Today, Rishi Sunak delivered his third Budget—and his first not dominated by Covid. Against an unenviable backdrop of spiking inflation, a slowing recovery and strained public services, a big upgrade in the forecast for the public finances allowed the chancellor to combine significant short-term support for households and businesses with the most generous multi-year Spending Review since New Labour’s heyday. He did so while keeping considerable fiscal firepower in reserve, to be deployed either to support the recovery if it falters further or—as the chancellor will hope—for a pre-election giveaway. The package seems well-balanced, but the political and economic path that lies ahead may not be straightforward for Sunak.
Strip away the blizzard of spending announcements aimed at delivering on the government’s ambitions—whether on levelling up, net zero or Britain’s status as a science superpower—and Sunak had two key judgments to make today.
The first was around what short-term support to offer the economy and households through a potentially tricky next 12 months. After the sugar rush of the initial post-lockdown reopening, a slowing recovery combined with rising inflation has left the chancellor in a tough spot. On the one hand, he has been facing pressure to support struggling households facing a cost of living squeeze and businesses facing the end of existing Covid support. On the other, with the Bank of England already sounding the alarm over the need to raise interest rates to tame inflation, Sunak would have been mindful of the fate of certain predecessors of his who put their foot down on the accelerator once too often. Anthony Barber’s Budget in 1972 and Nigel Lawson’s in 1988 showered already overheating economies with more largesse, resulting in sharp rises in interest rates, booms turning to bust—and shredded political reputations.
Despite his outward warnings about inflation, the chancellor opted for a sizeable stimulus, over £20bn for each of the next two years. This was split between supporting households with a fuel duty freeze and an uplift in universal credit targeted specifically at those in work, a business rates cut, and an injection of cash into public services to tackle the Covid fallout. These measures will help answer criticism that Sunak is turning off fiscal support for the recovery before it is secure.
Sunak’s second key judgment was around the medium-term path for tax and spending. His three-year Spending Review set out some important political battle lines, with the chancellor confirming the fiscal framework the Tories will almost certainly fight the next election on: balancing day-to-day spending and having debt falling on a three-year forward look. Despite all the tough Treasury talk over the need to repair the battered public finances, a combination of previously announced tax rises and a massive £35bn annual upgrade in the OBR forecast for borrowing meant the chancellor had significant room for manoeuvre.
Recognising the pressure that public services are under—particularly from Covid—the chancellor used a chunk of that headroom to top up the overall spending pot for public services. Total departmental spending will rise by 3.8 per cent annually in real terms over the next three years. In setting out these measures, he has planted the Tories squarely in traditional Labour territory: a return to austerity this most certainly was not. That the chancellor was able to act in such a way while maintaining headroom against his fiscal rules will help him keep political definition with Labour, which has adopted similar fiscal rules but made clear it will spend every last penny of headroom.
The chancellor’s approach is not risk-free, however.
On the economic front, if the recovery runs out of steam despite today’s short-term support, and the chancellor is forced to provide yet more stimulus, it will leave him reputationally exposed, given that the UK has switched to fiscal consolidation faster than any other advanced economy. At the other end of the spectrum, today’s stimulus coming against a backdrop of above-target inflation leaves him vulnerable if price rises really take off and the Bank of England has to raise interest rates aggressively.
Perhaps the biggest challenge is on the political front, where the threat for the chancellor is more likely to come from within his own party than from the opposition. The size of today’s spending increases means he should be able to see off attacks that public services are being underfunded coming out of Covid. But it also may leave him vulnerable on his right flank. Most of the £40bn of tax rises he has announced were sold on the premise of fixing the public finances, not delivering a spending splurge.
More fundamental is the question of what type of peacetime chancellor Sunak wishes to be. He has done a commendable job over the last 18 months, nimbly navigating the politics and economics. He provided the huge fiscal support required when the pandemic hit, while seizing on the heightened public concern about borrowing that Covid unleashed to lock in difficult decisions on the public finances.
But if these tasks are largely done, the question for Sunak is “what next?” With Michael Gove setting himself up as the brains behind levelling up and the prime minister in command of the net-zero agenda, the risk for the chancellor is that he becomes seen as a begrudging facilitator of the government’s agenda, not a driver of it. With Covid no longer dominating all his bandwidth, the task he now faces is to set out a clear agenda of his own.
