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Advice for Rishi Sunak on the eve of the Budget

At next week’s Budget, Rishi Sunak will again need to walk the high wire he so smoothly managed at the Conservative party conference a fortnight ago. In a packed hall, reflecting the star quality party members see in him, he called himself a pragmatist who cares “about what works, not about the purity of any dogma”. Yet in the very next sentence he declared “I believe in fiscal responsibility”.

That has been Sunak’s consistent stance as UK chancellor. But despite his claim for the party-wide appeal of his philosophy, it marks a dividing line. The prime minister leads the pack of those seeming unconvinced — or opposed — and that makes Sunak’s decisions in this Budget even harder.

The clash is not just the age-old tussle between chancellors and their prime ministers about whether to spend more or less, although that is part of it. The response to the Covid-19 pandemic has made billions of pounds sound like toy money, pulled endlessly out of a stash as each roll of the dice brings a new crisis. The pandemic has also reminded people of just how much they rely on their public services: health, education, police, as well as local services such as parks. 

The rift is a deeper one, even in a party whose pragmatism has underpinned many election victories. The question is whether conservatism is still about restraining the scope of government or (as it now seems under Johnson) about intervention in all kinds of markets (think of energy prices, immigration controls and more relaxed state aid rules). It is about whether Conservatives back low taxes (and spending) or have jettisoned that in the face of public desire for better services.

Of Sunak’s decisions next week, anything resembling green taxes may get a blast of criticism at home given rising gas prices. Yet their absence will expose the UK to international scorn just days before the UK hosts the COP26 climate change summit in Glasgow.

This week, the government poured out a torrent of long documents (and endnotes, and tables) setting out its long awaited strategy. But the gaps in it are in Sunak’s domain: the lack so far of a tax framework that will nudge the country through the painful transition to electric cars and boilers and better insulated houses. Green taxes risk being very unpopular.

One of the chancellor’s toughest decisions will be what to do about public services. The Budget coincides with a spending review when he will announce the money for the main departments of State for the next three years, the first multiyear plan since 2015.

Sunak has already taken some difficult steps, such as a controversial rise in national insurance to pay for the prime minister’s new social care plan and to help the NHS catch up after Covid-19. He has already suggested that the total “envelope” for public services is very tight, meaning that for many services other than the NHS, spending will actually fall in real terms for the next two years — even perhaps in prisons, courts and local government where the impact of years of squeeze is well known. What is more, while the NHS has a big, early rise in spending to try to get rid of Covid backlogs, other departments probably will not — even education, where the lack of sufficient funding for catch-up teaching remains an open sore.

Most difficult of all, perhaps, Sunak must make a judgment on Johnson’s claim to have devised a new economic model. The prime minister claims that he is shifting the economy to higher wages, skills and productivity and away from high immigration and the low pay and lack of investment in productivity that, he argues, followed from this.

It is a doggedly optimistic view — and one that looks improvised in response to recent shortages of labour, fuel and other goods — that the simple device of curtailing immigration can solve productivity problems that governments for decades have tried to crack. The risk is that it simply produces higher wages and inflation. Or that it does raise investment, productivity and wages in some sectors, but that other people (notably those in the public sector or who receive benefits) suffer.

If Sunak is going to back this latest, noisy claim of his prime minister then he needs to propose how he will encourage investment in greater productivity and what he will do to protect those who lose out in this transition. He will also need to persuade the Bank of England that inflationary pressures are as transitory as his prime minister would like them to be. Of course, Sunak has the option of disagreeing with Johnson’s presentation of the facts. But, for all its intellectual appeal, that is not a recipe for survival as chancellor.

The stakes are high, both politically and personally. Not only are these tough decisions, but they will shape the course of the UK for years, the fortunes of this prime minister — and Sunak’s too.

The writer is director of the Institute for Government, a think-tank

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