Sajid Javid has quit the government after Boris Johnson demanded that he fire his advisers if he wanted to stay in post. Rishi Sunak will become Chancellor, sharing a team of advisers with 10 Downing Street.
The Prime Minister is said to desire a political and organisational relationship akin to the one enjoyed by David Cameron and George Osborne. As far as effective Downing Street-Treasury combos go, theirs was best in class, regardless of what one thinks about what it delivered.
But the relationship between the two was only partially about organisational fusion (which, thanks to the demands of coalition, never went as far as the two planned before the 2010 election). It was also the result of the strong personal relationship between the two. I think Daniel Finkelstein is right to say that there is a hard limit to what you can achieve in terms of the Downing Street-Treasury relationship through organisational fixes alone.
In terms of personnel, while this is headline news, it’s not yet clear how big a development it is as far as policy is concerned. It’s a big change in terms of how we’re governed – it might not necessarily mean a big long-term change in terms of what government does.
While many Treasury officials have been left stunned by the events of the last 24 hours, the main reason for their surprise is not that the most powerful prime minister in recent times is seeking greater control over the Budget, but that Sajid Javid decided to walk out.
But now the dust is settling, many are left asking: what, exactly, has changed? Yesterday they had a congenial, well-qualified Chancellor who believed that, with interest rates set to remain at record lows across the world, during the next downturn, fiscal policy will have to do much, much more and therefore wanted to keep reducing debt while the economy is still growing.
Today they have a congenial, well-qualified chancellor who thinks that with interest rates at record lows, fiscal policy will have to do much, much, much more…but may also be more relaxed about keeping debt flat rather than falling.
However, while you can ease some of the difficulties around the looming Budget if your priority is servicing the interest on government debt rather than reducing the overall debt pile, you can’t eliminate them. The only way to ease the government’s fiscal straitjacket is to be willing to either break Boris Johnson’s promises on tax or to be willing to borrow significantly more: to not only move away from reducing the overall debt pile but to be willing to add to it. It is far from clear that is a bridge that Sunak is willing to cross.
And actively deciding that the government can simply borrow to fund more day-to-day spending is not a risk-free choice, either. Significant deficit spending in an economy that is at or close to full employment, as ours is, may have serious negative economic consequences – which can’t be wished away whether the Chancellor’s special advisers report to him or to the Prime Minister.