LONDON (Reuters) - Britain has room to borrow more, according to Gerard Lyons, a former economic adviser to new Prime Minister Boris Johnson who is now tipped as a potential contender to succeed Mark Carney as governor of the Bank of England.
Johnson made tax and spending promises with a cost of tens of billions of pounds while campaigning for leadership of the Conservative Party, drawing a parting warning from Philip Hammond, who quit as finance minister just before Johnson took office.
Hammond had held back on increases to public spending over the past year due to uncertainty about whether Britain would face heavy economic costs from a no-deal Brexit -- something Johnson says may be needed to ensure Britain leaves the European Union on Oct. 31.
Lyons said there was some capacity for borrowing to increase, after years of spending restraint.
"There is scope, in an environment where nominal GDP is rising, real interest rates are low, for the government to actually borrow more in a credible way," Lyons told BBC radio in an interview.
"As we have seen in recent years, the fiscal numbers have improved. And even though in the near term there will be some uncertainty associated with leaving the EU, I think there is more room for manoeuvre."
Last week the Times newspaper said Lyons, a prominent pro-Brexit economist who now advises online wealth management company Netwealth, had been interviewed as a potential successor to Carney. Civil servants have interviewed a number of applicants, and will give a shortlist to Johnson's new finance minister, Sajid Javid.
Investors are waiting for detail on Johnson's approach to the public finances.
Rishi Sunak, Johnson's new deputy finance minister, told Sky News on Thursday there was 26 billion pounds of "headroom" for more spending, although he said he wanted to keep the rule that debt should fall as a percentage of economic output each year.
On Tuesday BoE Chief Economist Andy Haldane said Britain's low borrowing costs meant there was no better time to sort out Britain's deep-rooted structural problems around education, training and transport.
The interest rate on a 10-year British government bond <GB10YT=RR> stands below 0.7%, not far from record lows struck in the aftermath of the 2016 vote to leave the European Union.
(Reporting by Andy Bruce, additional reporting by Kylie MacLellan; Editing by Jon Boyle and Catherine Evans)
