Maybe it’s one of those aging things, like the policemen getting younger – but to me our country’s political leaders seem to be becoming more overtly political. I thought that of Tony Blair’s New Labour in 1997, who set the trend for leaders since. And now our current prime minister, Boris Johnson, has taken it to a previously unthinkable extreme. This is evident in yesterday’s statement by Rishi Sunak, the Chancellor. The politics was blatant; a clear strategy for making the country a better place was not.
Mr Sunak was once a rising star in British politics, but now he look as if he will join the long list of politicians (and others) whose careers have been indelibly tarnished by association with Mr Johnson. Yesterday’s effort did not measure up to the difficult economic situation that so many people in the country face – and he instead focused on a number of core interest groups that the conservatives hope will secure them another general election victory, through their votes or donations. This was all too transparent, and not helped by Mr Sunak’s ridiculous claims, such as that he was a tax-cutting Chancellor.
To be fair, the government’s job in managing the economy is unusually difficult right now. Managing a modern economy is like riding a bronco – it is mostly about responding to collective decisions made by individuals and businesses, inside and outside the country, that can quickly overwhelm the tax and spending measures that are the government’s main tools of control. The government’s difficulties are not really of its own making on this occasion. The root causes are the covid-19 pandemic, the war in Ukraine and the ongoing challenge of climate change. These have delivered a series of economic shocks of a type that policymakers are completely unused to dealing with. The pandemic delivered a major but temporary shock to demand – and the government won plaudits for its drastic policies, like the furlough scheme to underwrite jobs. But it also dealt a huge blow to world supply chains, and that is what policymakers were unready for. From the 1990s onwards new technologies and globalisation bequeathed a highly flexible system of global supply, which people have taken for granted. Even before the pandemic these changes were going into reverse. As demand recovered from the shock, supply did not recover as quickly – and inflation is the result. The problem emerged in 2021, but policymakers responded with denial – including the politically independent central bankers. Nobody seems to know what to do. The last time anything like this happened was in the 1970s, and that was a very different world.
The government is faced with three big and immediate problems: benefits, public sector pay and help for people on lower incomes. Costs for basics, such as food, fuel and heating are rising much faster than incomes and this is creating widespread hardship. The government’s response is to offer some help to working people on lower incomes (provided they are above the minimum tax threshold), and that is about it. Government services are not being given additional budgets to deal with additional pay demands; benefits are being uplifted by a wholly outdated figure for inflation. Most of the help being offered is in fact an offset to rises in National Insurance contributions (NICs) (by changing the rate of pay at which NICs kick in), rather than an actual cut – though at least this targets lower incomes better than deferring the rises altogether. A summer of hardship lies ahead. The country is facing a big squeeze on living standards, and poorer people will feel this the most.
There are two main constraints to the government using the public purse to alleviate hardship. The first is the balance of supply and demand. If the economy cannot deliver the goods and services paid for by government largesse, then inflation will result, with the potential for a wage-price spiral. That was not a problem in the early phase of the pandemic, when government support was very generous, as private demand plummeted even faster than capacity to supply. It is clearly a problem now, and tricky to offset with tax rises, as these tend to affect demand less if they target the better. The second constraint is on public finances – the government’s ability to raise funds if spending outstrips taxation. It is a lot less clear that this is in fact a problem, though levels of public debt are high, and the Bank of England cannot help out by buying bonds through Quantitive Easing, as it could until recently. Still, solutions have been suggested, such as a windfall tax on oil and gas producers operating in Britain’s North Sea. The case for such a tax is a very strong one, but it is completely contrary to Treasury orthodoxy. This holds that it undermines the climate for business investment. In fact investment in oil and gas production in the UK has been very low. The government may feel that it wants that to change, with businesses investing their windfall profits in increasing production to make up reduced supply from Russia. But the government is hardly waving a big stick in order to get such a response.
I can accept that these constraints, especially the inflation risk, are real. But the crisis on living standards demands the taking of bigger risks with the economy than the government is willing to contemplate. In particular bringing forward increases to benefits for inflation looked like a no-brainer. The government’s thinking on that seems to be guided by pure politics. People on benefits (apart from pensioners) don’t vote Conservative and aren’t likely to. Instead the government is focusing help on people in work, and especially those with some stake in property (it is temporarily reducing property taxes, announced before yesterday’s statement). Pensioners are being spared the increase in NICs (which they are exempt from), and doubtless their incomes will catch up later in the parliament, using the “triple-lock” system of increasing the state pension.
Most remarkable of the measures announced yesterday was Mr Sunak’s plan to cut the rate of income tax in two year’s time. Given the ever-growing pressure on public services, it is hard to see how this can possibly be justified, except as a short-term gimmick for electoral advantage. It leaves me feeling exasperated. I am retired and drawing a generous private-sector pension (I’m not old enough for the state one). I was never going to suffer the increase in NICs, but I’m still going to benefit from the Council tax rebate, the fuel duty rebate, and, if it comes, the reduced rate in income tax. I am not facing any kind of hardship. This just doesn’t seem fair.
Will Mr Johnson get away with it? Labour is better placed to capitalise on the unfairness than it was when led by Jeremy Corbyn, but it is still tricky for them. There a still a broad swathe of conservative voters out there ready to be persuaded that people on benefits have only themselves to blame. But I think that pressure on public services, which now includes demand to increase our armed forces, is going to be very hard for the government to manage. Eventually reality will strike.
But in the short-term I think it will be Mr Sunak who will pay the political price rather than his boss.