FROM THE DESK OF

MARCUS BROOKES

  • Marcus Brookes
  • 18 February 2020
  • 5 minutes

The implications of the cabinet reshuffle

The UK government cabinet reshuffle was plodding along in traditional fashion with ministers being summoned and dismissed or promoted with no big surprises this morning. Then, a little before midday, Sajid Javid resigned as the Chancellor of the Exchequer.

It’s not unusual for the residents of 10 and 11 Downing Street to be at odds over how to run the national budget. It is rare for things to come to a head one month before the budget is announced by a new government facing a radical shift in the country’s legislative and trade environment (i.e. leaving the European Union).

Prime Minister Boris Johnson might have assembled a cabinet dominated by people who have been consistently supportive of him and his policies. But he’s left the new Chancellor of the Exchequer, Rishi Sunak, with a huge task to prepare and deliver the budget that is due in front of parliament on Wednesday 11th March.

Over the coming four weeks, Mr. Sunak must assemble a team of able advisers while also becoming familiar with the details of current public spending, revenue and the economic outlook.

After that, he has some big decisions to make:

  • Does he press on with the tremendously expensive HS2 project?

  • Does he deliver a controversial “mansion tax” that would be politically unpopular in traditional Conservative Party heartlands?

  • Does he deliver increased funding for public services (such as police and the NHS) as promised?

The immediate response to the change of residence at number 11 included a nudge up in the value of the pound. This was stimulated by traders and investors anticipating higher spending under Mr. Sunak than seemed likely under Mr. Javid (who was insistent on balancing the books).

Mr. Sunak’s decisions regarding public spending could have huge implications for investors. If he increases it substantially, as some observers are already expecting, then parts of the economy might benefit. This could present investment opportunities in companies contracted to deliver government contracts.

However, an increase in borrowing might be needed to pay for that extra spending.

More borrowing equates to more government bonds being sold. The ramifications of that can include lower bond prices, higher inflation and a lower value to the pound. All of these factors can affect investment values and decisions.

While this is all speculation at the moment, the Downing Street spat has made March’s budget even more significant than it already was. We will be listening carefully to further developments and reading between the lines of announcements over the coming weeks up to and beyond the budget.

Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment,

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