Will Javid’s departure lead to boom or bust?

Owl recommends this analysis of what Sajid David’s resignation might mean for the economy – Larry Elliot, economic editor of the Guardian:


It was billed as just a limited shuffling of the pack, but Boris Johnson’s reshuffle proved to be the moment when the simmering conflict between 10 Downing Street and the Treasury burst out into the open.

The departure of Sajid Javid and his replacement as chancellor by the inexperienced Rishi Sunak means that first blood has gone to the prime minister or, more accurately, his chief adviser Dominic Cummings.

Javid is out and Sunak is in – but not because of a Whitehall disagreement over the activities of the former chancellor’s special advisers. Nor is it simply about the shape of next month’s budget, important though the disagreements were between a prime minister bent on an expansionary package and a distinctly more cautious Javid.

Ultimately, this is about power and whether the Treasury should continue to exert its stranglehold over the totality of economic policy – or be relegated to the role of a finance ministry, as it is in so many other countries.

Britain has been here before. Maynard Keynes argued in the 1920s and 1930s that the Treasury’s obsession with balancing the budget was the wrong response to a demand-deficient and high unemployment economy.

In the 1960s, Harold Wilson hived off a large chunk of the Treasury’s responsibilities to a new Department of Economic Affairs. John Major’s answer to the Treasury’s dominance was to beef up the industry department and put Michael Heseltine in charge. Tony Blair regularly chafed at being kept in the dark about key economic decisions when Gordon Brown was running the Treasury.

The power grab attempt by Johnson and Cummings is somewhat different. Instead of setting up a brand new ministry, they have decided to make 10 Downing Street the hub of economic policy.
This approach has both strengths and weaknesses. Its strength is that there are many economists who think that a successful industrial strategy for Britain has to involve limiting the power of the Treasury to keep vetoing things on budgetary grounds.

As an institution, the Treasury is hard-wired to be conservative and has often been wrong as a result. It was, for example, fully behind George Osborne’s austerity programme in 2010 on the grounds that running big budget deficits risked losing the confidence of the financial markets and would result in much higher interest rates.

A better solution – and the one Johnson and Cummings are trying after 10 years that have seen the weakest wage and productivity growth since the 19th century – would have been to take advantage of low interest rates to borrow for public infrastructure projects that would have produced faster growth, higher tax receipts and a lower deficit.

The weakness of the Johnson-Cummings approach is that Downing Street really doesn’t have the resources to run economic policy itself and will have to import resources from elsewhere.
Unless, of course, Cummings thinks he is so smart he can run the show on his own. Even Keynes, a man famed for his arrogance, did not think that.

History suggests that the Treasury will play a long game. It will sit tight for a while, and work on the more expansionary package that the new chancellor is having prepared for him in Downing Street.
It will assume that after a while Sunak will go native as most chancellors do eventually. And it will wait – as it did when Wilson tried to clip its wings – for something to go wrong, knowing that in a financial crisis it will be fully back in business.

The boost provided by the budget will mean stronger short-term growth, but this war is not over by a long chalk.

One thought on “Will Javid’s departure lead to boom or bust?

  1. If Labour had won the recent election, Jeremy Corbyn with John Mc Donnell would have been running the show – for good or bad. But the Tories won and the show is being run by Dominic Cummings – an unelected person. Is this not misrepresentation? What you saw is certainly not what you got!


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