Brexit  

Redwood urges govt to increase spending to fight Brexit risk

Redwood urges govt to increase spending to fight Brexit risk

John Redwood, Conservative party MP and former leadership contender, has urged the government to increase public spending to protect the economy from the consequences of Brexit.

Mr Redwood, who is also chief global strategist for Charles Stanley, is a long-time advocate of the UK leaving the European Union.

In a blog post published yesterday (25 September) he wrote: "UK [economic] output will not be damaged by leaving.

"It could expand more than currently if the government stopped its ever tightening monetary and fiscal squeeze. The correct thing to do would be to offer tax cuts and increased spending in this autumn’s budget, covered by ending payments to the EU."

Monetary squeezes happen either when inflation is higher or interest rates rise, or both.

The UK government does not run monetary policy, the Bank of England does, though the government can influence inflation through its taxation and spending policies.

Mr Redwood’s remedy for Brexit uncertainty would likely add inflation to the system. And the government would not be able to guarantee that the Bank of England would not respond to those inflationary actions by putting interest rates up, which would be a "monetary squeeze" the type Mr Redwood objects to.

The Bank of England is mandated to achieve a rate of inflation close to or of 2 per cent. The current rate of UK inflation is 2.7 per cent, a six month high.

Bank of England governor Mark Carney told the Treasury select committee this month that, in the event of a "no deal" Brexit, it was likely that sterling would fall further.

He said this could generate a sharp uptick in inflation, and could force the Bank of England to put interest rates up.

He said the bank had ignored the surge in UK inflation caused by the decline in the value of sterling immediately after the UK voted to leave the EU in June 2016, because it viewed that inflation as temporary in nature.

But, in Mr Carney’s view, if the UK departs the EU without a deal, then the inflationary pressures will be more permanent, and the bank will put rates up, even if that negatively impacts the level of unemployment.

Mr Redwood’s comments come as a survey of UK equity fund managers, carried out by research firm Square Mile, showed 10 per cent felt a hard Brexit would be the most beneficial outcome for the FTSE All Share over the next year.

This compared with 39 per cent who felt a "soft Brexit" would be most beneficial, and 13 per cent who felt Brexit would make no difference either way.

Alan Miller, wealth manager at SCM Private, said: "More and more clients are becoming nervous, partly due to the risk of a no deal Brexit.

"In terms of our SCM portfolios, the main effect of any 'no-deal Brexit' would be due to any fall in the value of sterling.