Could Boris Johnson’s cakeism survive the markets?

In the brief time Sajid Javid was chancellor to Boris Johnson, he spelled out to The Spectator his ‘low for long’ theory about rates: a theory which would enable the new prime minister’s ambitious spending agenda. Speaking to Fraser Nelson in December 2019, Javid was confident that the era of ultra-low interest rates and extremely favourable borrowing costs was here to stay. ‘It just felt quite ludicrous seeing that a government could borrow at negative real interest rates and not take advantage of that,’ the then-chancellor told the magazine.

Convinced these circumstances would remain for ‘at least a decade’ he was willing to borrow tens of billions of pounds for infrastructure investment, to aid Johnson’s ‘levelling up’ agenda. But there were two major caveats. Javid was critical of then-Labour leader Jerermy Corbyn’s plan to borrow to fund ‘day-to-day spending’. And if these circumstances were to change, and rates were to rise, he said, Javid’s borrowing plans would fast be adapted – or perhaps even come to an end – in response.

Three years later, those circumstances have most certainly come to an end. It didn’t take the decade Javid predicted for investors to decide that the heavy levels of government borrowing taking place worldwide needed to come to an end. Or that they needed to have a big premium attached to account for growing risk. The vast amount of borrowing and money printing that took place during the height of the pandemic (the Bank of England printed more money in the first year of the pandemic than it did in the 10 years leading up to it) landed governments in precarious financial states, debt far higher and deficits much bigger than before Covid hit.

Then Liz Truss pushed markets over the edge when she, ironically, embraced borrowing for unfunded spending (in this case tax cuts) – the kind of spending which Javid warned about. The punishment – notably higher borrowing costs – is not expected to be rescinded until investors are confident that the British government is back on a financially sustainable path. So now the markets are playing a rather large role in determining the next leader: announcements in this new leadership race are no longer assessed by MP or voter reaction, but rather how the gilt market responds.

And Johnson is in the spotlight. As his odds to be the next leader narrowed substantially today, the cost of borrowing rose, with 10-year gilt yields rising back over 4 per cent in almost real-time, following the news. It is of course impossible to say that this is directly (and only) down to the news about a possible Johnson return. But not only does there seem to be a link, it raises an important point about the former prime minister’s return: will the markets tolerate Johnson’s economic philosophy of ‘cakeism’, promising the world to voters in terms of tax cuts and spending hikes, unwilling to make the trade-offs? In these new economic times, it's likely they would not.

Days after Javid’s comments to this magazine in 2019, Johnson went on to secure himself an 80-seat majority: one which included a mandate for more spending. The pandemic, ironically, allowed for this to happen by hundreds of billions of pounds more than was ever expected. But for most of Johnson’s time in Downing Street, he was engaged in an economic tug-of-war with his neighbour in No. 11. 

Had Johnson had the opportunity, he seemed ready to embrace a Truss-style agenda, borrowing to increase day-to-day spending on both cut tax and giveaways. It was Rishi Sunak who repeatedly stopped Johnson from doing so: insisting on tax hikes in his March 2021 Budget to prepare the public finances for inflation; demanding that any extra money for health and social care be funded (Johnson chose the NI levy over spending cuts). It was eventually the reason the former chancellor resigned, citing ‘fundamentally different’ economic strategies. Sunak’s was one of fiscal discipline, Johnson’s being one to offer yet more cake.

As I say in today’s Telegraph, the explosion of Truss’s mini-Budget is a warning to any Tory or Labour MP that still thinks they can borrow on the cheap for day-to-day tax cuts or spending hikes. Which renders Johnson’s ‘cakeism’ out of step with the times. Perhaps if he returned, Johnson would come back financially informed and reformed, ready to tell the country about the tough choices ahead, needed to get the public finances back in order.

But today’s gilt market jump is a suspicion on the part of investors, who are familiar with Johnson’s record, that this would not be his tone. If he makes a comeback, that is. If Johnson returns to Downing Street, he’ll be all but forced to leave ‘cakeism’ behind.