The race to choose a new Prime Minister will potentially see fiscal and monetary policy head in different directions

With Boris Johnson set to step down as Prime Minister, the leadership campaign to succeed him will likely see some candidates call for a change in direction on taxation and spending.

Jason Hollands
Jason Hollands
Published: 07 Jul 2022 Updated: 07 Jul 2022

Jason Hollands, Managing Director of Bestinvest, the online investment platform and coaching service, comments:

“The news that Boris Johnson has finally succumbed to mounting pressure to step down as Prime Minister, while aiming to hang on until the autumn, officially fires the starting pistol on leadership election with a likely crowded field of candidates. It also creates the space for the new Chancellor, Nadhim Zahawi, to potentially bring forward a Budget or fiscal statement, while simultaneously campaigning for the top job, should he choose to run. At the very least, he will be able to set out his economic vision from an advantageous platform.

“The Prime Minister’s woes have come from trust issues but large parts of the Conservative Party and its supporters in the country have also been concerned about policy too, especially his insatiable appetite for high spending and the rising tax burden, which they regard as not very Conservative. The leadership election will likely see debate over the direction of policy, with candidates setting out their stalls on  economic policy and taxation. A number are likely to argue for a return to the Tories historic heartland as the low tax party. Others may argue for fiscal prudence and discipline and the need to get a grip on spending.

“Political pressure to cut taxes potentially puts the UK on course for a situation where monetary policy from the Bank of England and fiscal policy from the UK Government are misaligned, even pulling in different directions.  The Bank of England are firmly committed to tightening monetary policy to slay the dragon of inflation – even though this will impact economic growth in the process. The potential direction of Government fiscal policy, if the call for tax cuts gathers momentum, is expansionary and could mean inflation lingers longer. If the Government dials up fiscal stimulus before inflation has clearly peaked, this may ultimately prompt the Bank of England to accelerate the pace of rate rises.

“However, for businesses, any sign that next year’s planned corporation tax hikes, which will see the main rate leap from 19% to 25%, might be jettisoned, will be welcome news. This would be particularly positive for domestically focused companies that are more prevalent in the mid-cap and smaller companies parts of the UK equity market.”