Trouble Brews for U.K.’s Sunak as Tory Rebels Hit Out on Aid Cut

(Bloomberg) -- A Conservative Party row over cuts to U.K. foreign aid spending is a warning of bigger challenges to come for Chancellor of the Exchequer Rishi Sunak, as he tries to repair public finances battered by the pandemic.

Privately, officials acknowledge the government has its hands full in Parliament despite holding a significant majority, because a group of MPs in Boris Johnson’s ruling party have repeatedly shown their willingness to rebel.

That’s especially problematic on foreign aid, which is legally mandated at 0.7% of gross domestic product. Sunak wants to temporarily reduce the level to 0.5% until the country’s finances have recovered from the pandemic, but the government has not offered a vote on the measure.

The Tory rebels used an emergency debate Tuesday in Parliament to show they’re not backing down, after they failed to force a U-turn on Monday.

Tory Rebels Get Chance to Challenge Johnson on U.K. Aid Cut

The spending cut “will have a devastating impact on the poorest in the world and it will damage the U.K.,” former Prime Minister Theresa May told MPs. “The damage it does to our reputation means that it will be far harder for us as a country to argue for change that we want internationally.”

Record Deficit

The backlash is a significant challenge for Sunak, given he will face far larger spending decisions in the coming months. The aid cut would save the Treasury about 4 billion pounds ($5.7 billion) this year, barely scratching the surface of a deficit of more than 300 billion pounds -- the most in British peacetime.

An official said the spending pressures on Sunak are huge, hence the chancellor’s preference is to announce policies at fiscal events -- such as budgets and spending reviews -- so the Treasury can work through all the trade-offs at the same time. A second official said the government will restore the lost aid spending when the fiscal situation allows, and it’s right to prioritize spending on public services in the meantime.

“Decisions such as this are not easy,” Treasury minister Steve Barclay told the House of Commons. “The situation in short is this: a hugely difficult economic and fiscal situation, which requires in turn difficult actions.” The government has said it’s not planning to let MPs vote on the issue.

Still, the row suggests Sunak will have to tread carefully as he looks for savings, while also trying to fuel a recovery.

‘Fiscal Straitjacket’

“Trying to do both at once just makes it harder to really achieve either,” James Smith, research director at the Resolution Foundation, said in an interview. Spending rules envisaged in the Tory party’s 2019 election manifesto also complicate matters for Sunak, he said, because they create a “fiscal straitjacket” for the chancellor.

The tension between what the Tories promised in 2019 and Sunak’s current plans lies at the heart of the rebellion over foreign aid. Former International Development Secretary Andrew Mitchell, who is leading the challenge against the government, told Parliament the rebels would have won by at least nine votes had support for their stance been tested on Monday.

“We shouldn’t behave in this way,” Mitchell said. “For two decades the U.K. has been a development leader, not just because it’s morally right and accords with our values but because it’s in our own national interest.”

There have been other spats over spending. Earlier this year, Tory backbenchers pressured Sunak into extending a temporary 20 pounds-a-week uplift in welfare payments until October.

Last week, Johnson’s own education czar resigned after the government announced spending on catch-up classes for children that was just a 10th of the budget he recommended.

Competing Promises

For Sunak, the conundrum is how to repair the books, without squashing the recovery and while still delivering on the ‘leveling up’ agenda that helped the Tories to a landslide victory in 2019. The former implies an eye on debt and the deficit, the latter two point to spending.

The chancellor has himself described fiscal sustainability as a “sacred” duty to ensure Britain is prepared for the next crisis, whenever it comes.

“If the Treasury is just worrying about a deficit problem, it should be focused on tax rises that can stick or spending cuts that can stick,” said Carl Emmerson, deputy director at the Institute for Fiscal Studies. In terms of pressures on Sunak, he said: “It’s easy to come up with lots of reasons why we’ll spend more; it’s harder to come up with reasons why we’ll spend less.”

The chancellor will probably need to fork out more than he’s earmarked for ongoing Covid costs, Emmerson said. Catchup education may need enduring support, and the National Health Service more resources, he said.

Tory Splits

Internal Tory divisions also complicate matters, as illustrated by the “clash” on aid, according to Nicky Morgan, a Tory peer who served in Johnson’s cabinet until last year.

The aid cut polls well among voters -- especially in the historically Labour seats -- dubbed the Red Wall -- in northern England that propelled Johnson to victory on 2019. Opposition has come from Conservative MPs in more traditional Tory heartlands.

“The chancellor has some very difficult decisions, because you have some areas of spending that are protected or politically cannot be touched, and that just means there are other areas that are even more vulnerable than they normally would be,” Morgan said.

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