Soaring living costs, shortages on supermarket shelves and a health emergency that was supposed to be all over bar the shouting.
Rarely in peacetime has a British chancellor faced a more perilous economic backdrop for a budget, as the Covid recovery runs out of steam amid rising pressure on families and the worst supply chain meltdown since the 1970s.
After a far more difficult start to autumn than expected, this Wednesday hardly appears the ideal moment for setting out a long-term vision with the first three-year spending review since 2015, and as global attention turns to the Cop26 climate summit in Glasgow.
But for Rishi Sunak, Wednesday’s tax and spending set piece stands as a golden opportunity to assert his status as the “whatever it takes” chancellor, in a budget aimed to fix multiple pressures facing the government.
After 18 months frustrated by crisis management and false starts escaping from Covid-19, Sunak will want to show the government is back on the front foot and looking to the future; no matter the difficulties of the present.
There will be a series of crowd-pleasing spending announcements with a focus on levelling up and net zero – including billions for regional transport, funding green projects, and cash to support skills, training and jobs. Rising living costs must be acknowledged, with a £500m winter hardship fund already announced.
It would take a tin-eared chancellor to ignore these matters. But whether the new plan matches the scale of the challenge will be an entirely different question after a series of retrograde steps in recent weeks. Setting a tough direction of travel before the chancellor’s speech on Wednesday, taxes on workers will rise, while universal credit is slashed by £20 a week in the biggest ever overnight cut to benefits.
In the raids on workers and businesses, the Tory plans already announced so far this year amount to ramping up taxes by as much as £36bn a year – a bigger jump than at any budget since the mid-1970s.
For a party self-obsessed with its modern folklore as the guardians of laissez-faire capitalism, it is a stark transformation. Company bosses now warn squeezing the pips will undermine the plan to build back better from Covid, level up and decarbonise; arguing that higher taxes and burdensome regulation prevent them from investing.
Approaching such limits of accepted Tory wisdom, expectations are that Sunak will duck further substantial tax-raising measures at the budget, with the chances more likely of the chancellor talking tough about fixing the government finances.
Hints were thrown at the Conservative conference earlier this month, with the chancellor telling party members it was economically irresponsible and immoral to stack up bills for future generations to pay. “It’s not the state’s money. It’s your money,” he told the crowds gathered in Manchester.
Such invocation of Thatcher serves one purpose: hawkish fiscal credentials have always proven popular among the Tory selectorate for future leaders.
For such fans of deficit reduction, there will be good news this week. Government borrowing is expected to come in as much as £55bn lower than forecast earlier this year, according to the Institute for Fiscal Studies, at about £180bn – a dramatic fall from a peacetime record of £355bn last year.
However, Sunak has instructed the Office for Budget Responsibility (OBR) to use older figures for the economy from September. This means the gains are unlikely to be as healthy in the budget forecasts, given that the numbers will miss out revisions made this month to GDP figures upgrading the strength of the economy.
While it might sound odd for a chancellor to want weaker figures, there are clear political benefits – put simply, talking down Britain today will help paint a rosier picture tomorrow.
Speculation is rife that Sunak is preparing to build up an election war chest for the future, with a nod and a wink to Tory MPs that apparent tough-sounding tax rises could be ditched – if the public finances appear fixed on paper before then. With voters likely to head to the polls in 2024, the temptation is clear.
With this in mind, Sunak is expected to announce new rules governing the public finances to ensure borrowing is cut and debt levels lowered. However, much of the exchequer’s income depends on the strength of the economy – and herein lies the problem: embracing austerity, as shown by George Osborne in 2010, risks hitting growth; making Sunak’s fiscal prudence entirely self-defeating.
At the budget, the OBR is expected to make two key assessments that will inform Sunak’s decisions. First, the recent surge in inflation will lead the Treasury’s tax and spending watchdog to warn that interest payments on national debt will rise because of linkages between government bonds, inflation and interest rates.
Second, an assessment for long-term economic scarring from Covid could be downgraded, following the lead set by the Bank of England after a faster recovery earlier this year.
In estimates made earlier this month, the IFS said that under an optimistic scenario with minimal scarring, Sunak could be on track for producing the biggest budget surplus since the early 1970s. In sharp contrast, in a pessimistic scenario, a very incomplete recovery would keep borrowing elevated and would likely lead to spending cuts or tax rises.
The fear is Sunak will give the OBR’s first judgment top billing, while ignoring his power to influence the latter through investing in growth.
Failure to provide sufficient investment at this stage of the economy’s recovery would be highly irresponsible and ultimately short-sighted. Leading economists note that debt interest payments remain at the second-lowest level since the 1950s, leaving plenty of room for further borrowing and investment, and that additional funding is essential to put the economy on a secure and sustainable footing.
Faced with a cost of living crisis, climate emergency, and after a decade of austerity driving up inequalities between towns and cities across Britain, investment can help spur economic growth, generating higher tax receipts and cutting debt levels.
Rather than a budget with one eye on the next election, Sunak must do whatever it takes today.