Rishi Sunak has just delivered one of the oddest economic statements in recent years. Sunak punctuated his speech to MPs with warnings from the Office for Budget Responsibility that we were living through a period of “unusually high uncertainty”. Indeed, as confirmation of the gloomy economic climate, the OBR’s growth forecasts for the coming years were revised downwards. Ominously, the Chancellor made clear that these forecasts had not considered the consequences of the war in Ukraine. Sunak was blunt. He acknowledged the economic situation could “worsen”.
Yet he felt the need to stride through the foggy future and announce a cut to the basic rate of income tax in 2024. The strange announcement is illuminating for several reasons. For businesses wondering when the next election will be here is a big clue. Boris Johnson and Sunak are targeting 2024 and not an early election next year. They seek a campaign following a tax-cutting budget.
Usually a pre-election tax cut is kept as a surprise until the very last minute to propel a governing party towards a campaign. But, given today’s announcement, two years before implementation, there will now be no surprise in 2024. The far-off pledge shows that Johnson and Sunak are alarmed by the commentary about their tax-rising policies over the last couple of years. As worried Tory MPs have noted, the duo have presided over more tax rises already than Blair and Brown did in ten years. For different reasons both Johnson and Sunak needed some good news now about a cut in income tax. As a result, they announced it early. Johnson wants to keep his job; Sunak would like to be Prime Minister. They tried to give Tory MPs some distant good news, but the pledge is both politically and economically risky. Will they have to find other surprises by 2024? Will the cut seem credible then?
The measures that take immediate effect are broadly unsurprising: a cut in fuel duty and the lifting of the threshold before National Insurance is paid. Some Tory MPs were delighted that the threshold was raised by £3,000, higher than they had anticipated.
But on the whole Sunak did the least possible in the short term. He knows he will have to do more in the autumn when he delivers his official annual Budget. This was only meant to be an economic update, but there has not been a single statement from Sunak during a period of economic calm. This was no exception. He had no choice but to deliver in effect a mini budget.
Looking ahead Sunak could not have been clearer as to how businesses can engage with government in the run up to the Autumn Budget. If he has had a distinctive theme as Chancellor, it is his search for a ‘business-led recovery’. This was the main topic in his Mais lecture, delivered on the day Russia invaded Ukraine and therefore largely overlooked. Sunak had spent huge amounts of time on the lecture, traditionally regarded as the address that defines Chancellors. In his statement to MPs, he expanded on the Mais lecture, telling them he was exploring “tax cutting options” that encourage the private sector to “innovate”, invest in vocational training, spend more on R and D, and on capital investment. He plans a big package of fiscal reforms this autumn and will be consulting with businesses in the coming months. Sunak sees these reforms as a way of addressing the UK’s relatively low productivity and to boost economic growth when the economy is weak.
I sense he genuinely wants to engage with businesses as to how this can be brought about. He has not yet decided on the tax policies that he plans to unveil in the autumn budget.
For businesses wondering how Labour will approach the next election, the Shadow Chancellor, Rachel Reeves, provided several answers in her response. She adopted a similar approach to that of Gordon Brown when he was Shadow Chancellor in the run up to the 1997 election. In her case she attacked Sunak’s National Insurance rise and accused him of wasting taxpayers’ money in spending billions on useless equipment during the pandemic. Brown did the same in 1997, arguing for ‘fair’ taxes rather than ‘higher’ taxes and pledging ‘competent’ spending rather than wasteful expenditure. Reeves also accused Sunak of ignoring the needs of businesses. Like Brown, Reeves wants to be seen as a pro- business Shadow Chancellor. She is keen to engage with business and is struck by how businesses are increasingly keen to engage with her.
For now, the return of inflation has some advantages for Sunak. Higher prices mean higher tax receipts. This has given him some wriggle room to play the fiscal conservative that also intervenes by spending money. But those benefits do not last very long. Soon public sector pay claims will soar in order to meet rising prices. High inflation can also undermine already low levels of economic growth. Inflation – more than any other economic factor -tends to destabilise governments. Sunak is keeping his fingers crossed that he has done enough in the short term. Some Conservative MPs are not so sure. The OBR’s official forecast is that this year, real household disposable income per person – or living standards – will fall by more than at any time since reliable data was collected. His promotion shortly before the pandemic means that Sunak has endured a turbulent time as Chancellor. Arguably the biggest storms are still to come.