Being Chancellor is about balancing: balancing the budget and balancing public opinion against responsible management of the nation’s finances.
As a balancing act, Budget 2021 was, politically and economically, the most difficult that any Chancellor has faced for many years. Not only does Rishi Sunak face a huge deficit, sky-high and growing national debt, an ageing population and an economy reeling from the effects of COVID-19 – but his room for manoeuvre was restricted by the prime minister’s refusal to countenance income tax rises or any change to the triple lock on pensions and more general resistance among Conservative MPs to tax rises.
To add a bit of context, all the politically ‘easy’ cuts and fixes– such as pegging certain state benefits and public sector pensions to the consumer prices index rather than the retail price index – were carried out in the Cameron-Osborne era, further restricting his room for manoeuvre.
The Chancellor is reportedly concerned that many Conservative MPs have got used to high state spending and appear to be addicted to the ‘magic money tree’, which they derided so much when Jeremy Corbyn led the Labour Party. Sunak has been one of a small number of parliamentarians warning that interest rates will not stay at their current low rates forever and that even a small rise would wreak havoc on the nation’s finances.
The Chancellor has enjoyed great popularity over the past year. Many have said it is easy to be popular when you are handing out plenty of money. The real challenge comes when you have to start reigning back spending.
How did he approach the challenge?
Firstly, he needed to continue to support the economy and be seen to do so. The headlines focused on the extension of the furlough programme to the end of September and a raft of other measures including, notably, the ‘super-deduction’ where companies that invest can reduce their tax bill by 130% of the costs.
Other support offered included stamp duty breaks continuing until 30 June and a business rates holiday for those in the retail and hospitality industries.
Secondly, he raised money using the limited options remaining to him – by increasing corporation tax from 19% to 25% in 2023. He also announced freezes in the rates at which the basic and higher rates of income tax kick in, allowing him to raise additional revenue as inflation takes it course.
He did not need to introduce tax rises at this stage; however, doing so at a time when he is continuing to provide billions in support for the economy provides him with some political cover and also sends an important message to the markets that the UK is serious about balancing the books. He also spent a great deal of time in the run-up to the budget preparing public opinion for tax rises – ‘testing’ the reaction to different proposals through a stream of leaks to the media, holding extensive discussions with Conservative MPs and making the case to the public. The word ‘honest’ featured prominently in the Budget speech as he sought to level with the public about the scale of the challenge.
The early signs are that he has largely succeeded in raising more money in tax while keeping Tory MPs and public opinion on side. A meeting with the Conservative backbench 1922 committee on Wednesday evening is reported to have been fairly positive – showing that he seems to have passed his first serious test in the Budget balancing act. The Tories have also seen a poll boost of 4 percentage points against a Labour Party that is still having difficulty in defining itself against a Conservative government demonstrating so much spending largesse.
But it has not been without its critics. The Chancellor has come under attack for a lack of green measures in the budget and the Royal College of Nursing is making preparations for possible strike action over the proposed 1% pay rise for NHS workers. Polling shows that a high proportion of voters would support a higher pay rise and it is notable that, when questioned about it, government figures have left the door open for a higher increase. Pay for NHS workers could yet be an issue that comes back to bite the Chancellor.
So far, though, he seems to have passed this first big test of his chancellorship. There will be many others but, so far, he seems to have demonstrated that he has the political and economic skills to manage the nation’s finances and bring public opinion with him.