He leaves behind a devalued Conservative Party, a devalued political accountability and a devalued Britain.
He brushes all that aside for a moment, leaving a devalued currency, public finances and economic outlook in his wake as well.
Whoever he replaces as the UK’s next Prime Minister will not necessarily be guided by what needs to be done to fix things, but by what is working to appeal to very different factions and views in the broader Tory party .
The economy could become a victim of any new government.
The Bank of England warned during the week that the economic outlook had “deteriorated significantly” after being weighed down by the Ukraine war, inflation and uncertainty.
Others are using much more stern language about the state of Britain’s economy, which recovered in February at the fastest rate since the end of World War II.
‘Idle’ or ‘pull apart’ are the sort of phrases that get thrown around a lot in the current situation, which many believe will plunge Britain into recession later this year.
For all of Boris Johnson’s demeaning of government and politics, his fingerprint is not clear on the immediate economic challenges facing the country.
Its impact goes deeper.
His state has taken out massive loans to survive the pandemic. His chancellor has granted billions in corporate loans that will probably never be repaid.
The inflationary crisis did not start in Britain and will not end there. Vladimir Putin decided to invade Ukraine without discussing it with Boris Johnson.
Johnson’s real influence on the evil show that could be unfolding in the UK economy was twofold: his obsession with short-term populism and his decision to push through a hard Brexit.
Populism has set the tone for a lack of financial accountability around some of the pandemic spending that has been made. This has contributed to the UK’s record public debt, which now stands at £2.3 trillion – or nearly 100 per cent of GDP.
If anything, the situation would likely have been much worse without a commitment by his former chancellor, Rishi Sunak, to raise taxes (including next year’s corporate tax).
And there’s the catch.
After Sunak resigned, Johnson was quick to suggest that he might now be able to reverse the obligation to raise corporate taxes.
The idea of hiking it went against old-style Tory principles and there will be enormous pressure on the new government to backtrack on this commitment made by Sunak.
If the new chancellor does that, there will be an even bigger hole in the national budget.
Johnson hasn’t created every economic challenge Britain is now facing – but his Brexit has exacerbated its problems. The creation of new costs for companies trying to gain access to its largest export market while cutting off a whole supply of international labor during an inflationary crisis is highly questionable.
Yet there is no serious desire among the Tories or the UK Labor Party leadership to reverse or water down the Brexit that has been put in place.
What is happening in the UK matters to the Irish economy. The decline in living standards and consumer spending power in the UK will hurt our tourism industry where the UK is our largest market.
Shrinking purchasing power will also affect Irish exports to the UK, although many Irish firms have shown their products can lead the UK market.
The biggest threat to the UK economy is inflation. The Bank of England will have its hands full trying to contain inflation with interest rates without worsening the problems of an economy that will most likely shrink.
The only good thing about the Bank of England is that it was quick to change interest rates. The ECB has yet to move. The longer they leave it, the more aggressive they may have to be.
A new Tory populism, with ministers keen on early results, could push the limits of what the treasury can sustain, leading to a new crisis a little later.
Johnson’s economic legacy will come at a heavy price.
Fiscal inflation measures give us VAT back
Micheál Martin’s cabinet tried to reverse the bad publicity fairly quickly last week. She hoped criticism of not accelerating new measures to cut the cost of living would be blown out of the water by the announcement of a €6.7 billion budget package that will come a few weeks early.
In view of the cash surplus accumulated in the first six months of the year and the bubbling tax revenue despite all the uncertainty, the government had no choice but to announce big things.
The budget is expected to include €2.7 billion in one-off measures, €1 billion in tax cuts and €3 billion in new spending to deal with demographic change. This €3 billion in demographic spending is required to stall due to our growing population.
Concerns about over-reliance on corporate tax revenues will persist.
If the corporation tax had come close to the long-term average, we would have posted a sizeable deficit for the half year – and what would have become of the 6.7 billion euros that the government is now talking about?
In the case of one-off measures for the cost of living, the financial damage to the treasury must be seen in context. It’s not really going to cost the government that much money.
Till receipts for the first half of 2022 show it took in €9.1 billion in VAT in the six months to June. Much of this costs 23 percent, but some at the lower hospitality rate of 9 percent. Take a mixed number that suggests the combined rate was around 20 percent.
With inflation approaching 10 percent, additional VAT revenue from living expenses could add up to €910 million in just six months.
Returning the extra VAT paid by consumers and businesses due to inflation seems pretty reasonable when targeted to those who need it most. It’s a bit like getting your VAT back.
High debts now present Digicel with a major challenge
Highly indebted companies today face a much more difficult task when it comes to refinancing corporate bonds at maturity.
Markets saw a major sell-off in corporate bond markets where some companies thrived on the steroids of central bank asset purchase programs and quantitative easing.
One such company tackling this challenge is Denis O’Brien’s Digicel, which has around $5.8 billion in net debt.
The telecom company has $925 million in bonds that are due for refinancing in about eight months. Bond values have fallen to just over 60 cents on the dollar in the last six months after starting the year in the high 90’s.
Last October, Digicel agreed to sell its Pacific unit to an Australian group for $1.6 billion, in a move that would have been music to bondholders’ ears.
A bizarre exit tax imposed on the company when it leaves the region where Papua New Guinea is its largest market complicates things a bit.
Digicel expects the sale to happen later this summer, and its trading performance has been incredibly robust. Service revenue for the year ended March increased 4 percent and EBITDA grew to $972 million.
Denis O’Brien keeps getting refinances over the line, even if it means bondholders getting a haircut like in the past. The theme for the coming months will be the interest rate these refinancers will charge.
In times of rising interest rates and falling corporate bonds, big debt has fallen out of favor.
https://www.independent.ie/opinion/comment/the-legacy-of-boris-johnson-is-that-he-devalued-just-about-everything-41827281.html Boris Johnson’s legacy is that he decried just about everything