Simon French: Rishi’s Big Moment

Chancellors rarely get an opportunity to set their own agendas. Invariably their tenure is shaped by events. Norman Lamont had Black Wednesday in 1992. Alistair Darling had the Global Financial Crisis of 2008. Both saw their time at the helm of the Treasury end within three years. Earlier this month current Chancellor, Rishi Sunak, began his third year in office. This week he gets the opportunity to set out an economic vision for what he will hope will be a post-crisis UK economy when he gives the 2022 Mais lecture. The respective Chancellorships of Nigel Lawson, Gordon Brown and George Osborne were characterised by the visions they laid out in their 1984, 1999 and 2010 lectures. For many this Thursday will be the moment to ask: “Will the real Rishi Sunak please stand up?”.

I have lost count of the number of questions I have fielded about why a Conservative Chancellor with a rhetorical preference for lower taxes has presided over policies that will increase the UK tax burden to its highest level since 1951. Putting these seemingly contradictory positions into their correct context – alongside a long-term economic strategy – will be Sunak’s aim this week.  

The context for the expansion in public spending since Sunak became Chancellor is crystal clear. COVID-19 required huge growth in the size of the state to protect jobs, businesses and avoid long-term scarring. This has been an extraordinary success story. Whilst surging inflation and COVID-loan losses should not be dismissed lightly, the alternative that an inevitable recession morphing into an avoidable depression was averted. Despite this, three spending legacies remain that will be harder to square with reducing the tax burden. The first of these are backlogs to public services generated by COVID-19. Whilst this is most obvious across the NHS with estimates that England’s waiting lists won’t peak for another two years, the pressures on courts, schools and a range of social services are similarly acute. Secondly, an ageing population continues to suck in demands for health care spending, social care, and pensions. These will accelerate in the years to come despite the terrible human cost of the pandemic. Finally, Brexit, for all the ink and political blood spilt, has increased the demand for public spending to carry out functions once made obsolete by the UK’s membership of the European Union. Whilst these set-up costs will ease with time, all credible analysis suggests enlarged public spending will be required as a direct result of leaving the EU. When Sunak speaks this week, this is the backdrop he faces – even if it is not the one he would wish for.   

Then there is the long-term economic vision. Many in Mr Sunak’s own party are seeing whether a potential leader-in-waiting has the big ideas to go with the big Instagram following. Again, three areas stand out. Many of his newest Parliamentary colleagues – elected in 2019 – see the centralisation of Treasury power as a big impediment to Levelling Up. They will want to see what plans he has for the Treasury to devolve tax and spending power to metropolitan leaders. Tees Valley Mayor, Ben Houchen, has already parked his tanks on the Treasury’s lawn demanding greater devolved powers to set business rates. How does this sit with former Brexit Minister, Lord Frost, and his call over the weekend for a more UK-wide approach to policymaking?  Secondly, what is the Chancellor’s plan for growth? Whilst the post-pandemic economic recovery is rapid, official forecasts see this tailing off with growth far more sluggish from 2023 onwards. Finally, will the Chancellor consider that the two central actors for delivering stable macroeconomic policy – an independent Bank of England and the Office for Budget Responsibility – remain fit for purpose? Both have attracted criticism in recent times for failure to foresee the pace of the recovery in output and prices.     

The stakes are high, both politically and economically for Rishi Sunak this week. He can choose short-term popularity or honesty regarding the outlook for the UK economy. He is unlikely to be able to achieve both.

Author: Simon French, Chief Economist and Head of Research at Panmure Gordon, writing for The Times.

Simon French

Managing Director, Head of Research