Boris Johnson's Replacement is Waiting in the Wings

Bookmark

As Chancellor of the Exchequer, Rishi Sunak has only one more rung to climb on the U.K. political ladder — to the position so many of his predecessors have coveted and failed to get: prime minister. This week the most powerful man in Westminster after Boris Johnson pitched his future wares in his second budget and set out Britain’s post-pandemic fiscal strategy.

If his plan to fill the black hole in the nation’s finances pays off, the top job lies wide open. Other pretenders have fallen on the rocky road to Brexit or have tried to take on Johnson and lost. Sunak’s formula is clear: largesse in the short term to reassure Britons who are returning to economic activity thanks to the vaccine rollout.

If, however, Conservative lawmakers grow restive about his substantial medium-term tax rises, Sunak knows his free-spending boss is well capable of throwing him to the wolves.

U.K. budgets are like figure-skating competitions, with scores for technical merit and artistic prowess. On the technical side, Sunak put on a good show. Rupert Harrison, an ex-adviser to the Treasury who now works for Blackrock Inc., gave top marks: “This budget is not just a down payment on fixing the permanent hole in the public finances caused by the pandemic,” he said. “On the basis of these forecasts he’s actually done it in one fell swoop — current budget deficit back to balance eventually.” 

In shorthand: Sunak is peddling true-blue fiscal conservatism, defying those who’d prefer a “never-never” approach to paying back debt incurred during the pandemic to support jobs and welfare. The only difference, and it’s a profound one, is that he’s jettisoning old Tory tribal habits by trying to achieve this through more tax rather than less spending. 

This is a bet on the instincts of the British people, too. Voters have tended to back center-right parties who believe the government can’t borrow for day-to-day spending once a crisis is over and that debt can’t keep rising indefinitely. 

Call it “the household fallacy” of economics if you will — an idea put about by Margaret Thatcher that a sensible government balances its budget — but Sunak’s hunch is that voters will agree with him that the state’s credit card will be maxed out soon, even if he’ll be dipping into their pockets to pay off the balance. They don’t trust Labour politicians with their money in hard times, this argument runs. 

Certainly, this has been the biggest economic crisis since the Great Depression, resulting in the fastest drop in output in modern history and demanding a thick cushion of public money. State spending has soared to fend off the disastrous economic effects of the lockdown. Sunak says the Treasury has splurged an “unimaginable” 352 billion pounds ($491 billion) on the pandemic.

In that spirit, he’ll continue to provide businesses and individuals with short-term catastrophe relief. The generous jobs furlough scheme will be extended until September, as will the emergency 20-pound rise in universal benefits. A tax holiday on buying average and lower priced houses will continue. By then, one hopes the U.K.’s vaccine program will have worked its magic (Covid variants permitting). The economy is then expected to boom as consumers spend their forced savings. 

This all sounds conventionally Keynesian. But Sunak also announced that he’ll raise taxes to their highest level since the 1960s — some 35% of gross domestic product, according to the Office for Budget Responsibility. The chancellor proposes to freeze basic and higher rates of income tax, so instead he’s planning a classic stealth tax. 

The Conservatives promised at the last election not to lift the three main taxes: income tax, sales tax (VAT) and national insurance. But the chancellor will scoop up an extra 18 billion pounds by dragging more than 1 million people into the higher tax band and another 1.3 million lower-paid workers into paying income tax.

Corporation tax will also rise from 19% to 25%, bringing in nearly 50 billion pounds extra over five years. That’s the end of the free-market dream of the U.K. competing for foreign investment with Ireland (12.5%), Luxembourg and Switzerland. Sunak hopes to soften the blow to business with “a super-deduction,” whereby he’ll lift the allowance rate for capital investment to 130% over two years.

The chancellor claims corporation tax will still be low compared with the U.S. and other G7 economies. But, according to Michael Devereux at Oxford University’s Said Business School, 24 OECD countries out of 36 have a lower effective marginal rate than the U.K. Foreign-owned businesses account for 30% of the country’s sluggish productivity growth. This is an odd signal to be sending the world post-Brexit.

Only a few years ago Tory members of Parliament would have mauled a chancellor for imposing tax rises, but the party has had to change. Even before the pandemic there were more pleas for spending than tax cuts. The so-called “red wall” seats won from Labour at the last election have been vocal about more handouts.

Few Tories want a return to the austerity policies that followed the financial crisis. So Sunak has gambled that as long as his MPs’ constituents get spending “jam” today they’ll ignore stealth taxes tomorrow. His sleight of hand has been to postpone his tax rises until 2023. The delay will kill the “too soon” argument that budget balancing will choke off recovery. 

Nonetheless, the chancellor is still working on the assumption that state spending will be lower than before the pandemic. Given the demographics of an ageing population and other calls on the public purse that seems unlikely. Predictions for growth from 2023 are a sluggish 1.7%.

Opinion polls tell us that the Tories have survived their terrible early mistakes in the pandemic and are being rewarded for their vaccine success. Sunak’s furlough support has been a winner with voters too. His smooth budget performance keeps him in pole position to succeed Johnson. The budget won’t, however, guarantee Britain is on a path to higher productivity and growth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Ivens was editor of the Sunday Times from 2013 to 2020 and was formerly its chief political commentator. He is a director of the Times Newspapers board.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.