ALEX BRUMMER: Spendaholic Rishi Sunak must realise there’s a price to pay for profligacy
As a financial writer, I’m used to receiving the occasional message or press release from HM Treasury.
But never can I remember such a torrent of major spending announcements landing in my email inbox as this week — all put out by the Chancellor’s team ahead of his Budget tomorrow.
It used to be that in the run-up to the Budget there was silence (known as ‘purdah’) from the Treasury amid concerns that any leaks might serve to benefit individual traders, businesses and consumers.
In 1947, Labour’s then-Chancellor Hugh Dalton was forced to resign after carelessly disclosing an income tax rise to London’s Evening Standard newspaper on his way to delivering his Budget speech.
Never can I remember such a torrent of major spending announcements landing in my email inbox as this week — all put out by the Chancellor’s team ahead of his Budget tomorrow
Those days have vanished. What started with a few strategic titbits fed to friendly newspapers in the spin years of New Labour has become a feast under Rishi Sunak.
Only a few weeks ago, the Chancellor was seeking to put distance between himself and the Prime Minister by making the case for prudence.
Appealing to Tory fiscal conservatives at the Party conference in Manchester, Sunak said it would be ‘immoral’ for Boris Johnson’s Government to pile up more debts.
But now the Chancellor, one of the richest men in the Cabinet, is doing just that, having unveiled in the past few days new spending commitments of £30 billion and rising — all in addition to the huge bill for measures to tackle Covid, such as the furlough scheme.
Quite reasonably, many are asking: where on earth is all this money to come from?
Among Sunak’s many recent promises have been £6.9 billion for transport outside London (as part of the ‘levelling-up’ agenda), £5.9 billion to deal with the NHS backlog, cash for arts and sports and military expenditure — and now a further £2.6 billion to boost education for children with special needs.
There’s even a new tax change planned that will allow more of the world’s ships to ‘fly the Union Jack . . . to bring more international shipping onshore’.
Far from being frugal, as he assured Tory voters in Manchester he would be, Sunak is splashing the cash like some latter-day Jeremy Corbyn.
And this is the crucial point.
Worthy as it may be to want to increase funding for much-needed public services, many of the tax-and-spend policies adopted by Boris Johnson’s Government fly in the face of well-established principles of public finance — not to mention ordinary household budgets.
Far from being frugal, as he assured Tory voters in Manchester he would be, Sunak is splashing the cash like some latter-day Jeremy Corbyn
Living beyond the means of the state can only end in disaster for us all.
British economic history is absolutely clear on this.
Episodes of unbounded profligacy from No 11 all too often lead to a run on the pound and a surge in interest rates that hammers anyone with a mortgage and makes servicing the interest on the national debt all but ruinous.
Certainly, Britain enjoys clear benefits in having an independent fiscal policy after leaving the EU, but ministers also need to recognise that, on our own, we are more vulnerable to external market forces.
That is why fiscal and monetary rectitude, a strategic anchor for Tory governments since Mrs Thatcher, are imperative if we are to crystallise the benefits of Brexit and ensure long-term prosperity.
Any government that opens the spending spigots too far and allows borrowing and debt to build up to unsustainable levels will find there is no margin of safety when the next crisis hits.
Of all politicians, Rishi Sunak has good reason to understand this. In his first Budget in March 2020, he set aside a modest £12 billion to cover the potential costs of Covid.
Eighteen months on, he has run up bills of £300 billion in his attempt to insulate the economy and prevent long-term scarring to output and jobs.
That represents the biggest explosion in public spending and the size of the state in peacetime.
Though the coronavirus rescue has been amazingly successful in preserving jobs, the national debt has ballooned to an almost unbelievable level: £2.2 trillion by several measures.
Some people seem to think that money spent by the Government grows on trees.
It doesn’t. The invoices eventually have to be paid by us workers through higher taxes, a squeeze on profits and incomes, or more likely both.
This process is already under way. In his March 2021 Budget, the Chancellor froze income tax allowances rather than adjusting them for inflation, drawing far more taxpayers into paying the Exchequer ever higher rates.
In September, in what was effectively a mini-Budget, the Chancellor imposed a surcharge of 1.25 per cent on both employers’ and employees’ national insurance contributions, hoping to raise £12 billion per year for the NHS and social care from next spring.
Corporation tax is also to jump to a hefty 25 per cent, up from 19 per cent, from 2023.
I suspect that in his rush to raise taxes and repair the admittedly gaping holes in the nation’s finances, Sunak has squandered his best chance of proper, roaring growth.
Sunak wants to show that the Conservatives care about poorer families by announcing a generous 6.6 per cent lift in the minimum wage to £9.50
The trouble is that the Chancellor seems to be trying to have it both ways. He knows he needs to blunt the growing perception that the Tories, far from being careful with your and my money, are instead high-tax big-spenders.
He will be fully aware that, while voters are keen to tackle global warming, they are deeply worried by the Government’s ‘net zero’ commitments, which could land the country with a staggering £1 trillion bill.
And yet, he cannot resist attempting to poach much of Labour’s traditional ground.
Look at the billions and billions of pounds ploughed into the NHS, for instance.
It’s certainly popular with voters, but the Institute for Fiscal Studies (IFS) points out that spending on health now accounts for an ‘astonishing’ 40 per cent of day-to-day public service outgoings.
That is quadruple the amount of 20 years ago and explains why the IFS says that ‘there is rather little left for anything else’.
Sunak wants to show that the Conservatives care about poorer families by announcing a generous 6.6 per cent lift in the minimum wage to £9.50.
He also hopes to stymie opposition criticism by pointing out that Government spending is rising by 3 per cent a year.
These lavish spending displays are all well and good — but only if the economy can fund them.
And this brings us to another problem. After so many bountiful giveaways during Covid, the public might start to think that the nation can live with higher deficits and debt — and without high taxes to pay for them.
That is a terrible miscalculation: one that could haunt the Tories when they next go to the polls, even if Labour promises to outdo their spending plans and tax middle-class families and the nation’s wealth-creators even more.
As well as being politically wrong-headed, it is a betrayal of sound money and the low-tax, free-enterprise nation that Brexit promised.
As Sunak makes the finishing touches to his Budget tomorrow, he would do well to remember this.
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