Published:

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.

Poor Rishi Sunak. Everyone has piled in to criticise his Spring Statement. I am no exception . Ensuring that Universal Credit did not fall in real terms should have been a priority, in my view, and the announcement of an income tax cut in two years’ time looked politically desperate

The Chancellor will be more concerned by the response of the Tory press, given that this appears to be the audience that he was most trying to impress.

But before turning to the reaction of Conservative newspapers, it is worth noting the economic and fiscal consequences of a burst of inflation.

When it comes to the public finances, inflation – in the short term – is good news. In nominal terms, we spend more so, VAT receipts increase; incomes go up, but thresholds lag behind, so receipts from income tax and national insurance contributions are buoyant.

As for departmental spending, it is determined at Comprehensive Spending Reviews in cash terms, so it is essentially ‘top-sliced’. Benefits and the state pension also fall in real terms (at least, initially). Debt interest payments go up (and this is a major item) but, in the round, inflation can help consolidate the public finances.

Of course, this is not cost free for the British public. Without some form of policy intervention, taxpayers are paying more while benefit recipients and the public services – including public sector workers – are getting less. The question is then what policy interventions should be made to protect particular groups from this rather accidental fiscal consolidation.

Now let us turn to the reaction of the Conservative-supporting press to the Spring Statement. In particular, let us have a look at the reaction of the Daily Telegraph, the newspaper that is perhaps most read by Tory members.

The edition the day after the Spring Statement did not make happy reading for the Chancellor. Allister Heath accused him of treating voters “like fools” and pursuing a “high-taxing, high-spending” economic model. “When he did act [to lower taxes],” complained Heath “it was by helping workers on lower incomes, loading even more of the burden onto the Conservative Party’s electoral base”.

Janet Daley also expressed a concern that the focus of tax cuts was on the low paid, fearing “a ‘low wage’ trap in which people who improve their earnings are less advantaged” and that “this becomes a disincentive to self-improvement”.

Camilla Tominey noted that, for all the talk of tax cuts, “this Chancellor has raised taxes more in two years than Gordon Brown managed during his entire 10 tax and spend years at the Treasury”, comparing Sunak unfavourably with Nigel Lawson, whose portrait hangs over the Chancellor’s desk.

The newspaper’s editorial summed it up by stating that “the Chancellor said he wanted people to be able to keep more of their own money, yet for many middle and upper earners the opposite is happening just as household costs are rocketing. Many will be Conservative supporters feeling that once again they are being asked to do the fiscal heavy lifting”.

There is a common thread to all these criticisms – the Chancellor talks a lot about lower taxes but taxes are going up – which essentially true. Paul Johnson of the Institute for Fiscal Studies (and not someone who would sign up to every claim made by Daily Telegraph columnists) described the Chancellor as being a “fiscal illusionist” on the basis that the money devoted to tax cuts was more than paid for by additional tax receipts caused by fiscal drag.

Already announced tax increases – such as freezing thresholds and allowances in the income tax system – now raise far more than previously thought. Taxes are high, and remain high even after Wednesday’s announcements. It is understandable if some find the Chancellor’s pretensions to be a tax-cutter a little galling.

The condemnation of Sunak in the Telegraph, however, does rather ignore two important points.

First, we are poorer than we thought we were. Growth is down this year from six per cent to 3.8 per cent and, notwithstanding the short term boost to the public finances, this has consequences.

There is also considerable uncertainty as to the economic future, and the Office for Budget Responsibility was not able to take into account fully the impact of the Russian invasion of Ukraine. Its forecasts may well be optimistic.

Second, Chancellors have to prioritise. Sunak cannot protect everyone from the consequences of inflation. Were he to attempt to do so, this would involve a fiscal stimulus that would stoke higher inflation and, ultimately, higher interest rates.

If we look at Sunak’s priorities last Wednesday, he could have protected those on benefits by uprating them in line with the current inflation rate rather than September’s lower rate, but he did not.

He could have protected public spending by ensuring that departments were funded in real terms, as he intended when announcing last October’s Comprehensive Spending Review. This might have allowed public sector pay to be protected in real terms – or at least match private sector pay – but, again, he did not.

Instead, Sunak focused nearly all of his firepower on cutting taxes with fuel duty cut, income tax cut (albeit in two years) and the NICs threshold raised substantially.

It still did not do him much good with the Telegraph columnists. The increase in the NICs threshold went to the wrong people, too focused on the low paid rather than “the Conservative Party’s electoral base” (who presumably read the Telegraph).

Nor were the tax cuts big enough with Heath, in particular, critical of Sunak’s focus on balancing the budget. “Fiscal conservatism isn’t morally, economically or electorally equivalent to low-tax conservatism” he told his readers, “it isn’t the real deal”.

Less critical of Sunak was David Frost, whose column in response to the spring statement appeared on the front page. Nonetheless, he made a similar argument to others that the focus should be on economic growth and that this should be achieved by lowering taxes. I will not dwell on the irony of those who are responsible for a hard Brexit prioritising economic growth (the OBR once again stated that the trade data shows that Brexit is knocking four per cent off GDP) but it is striking that Sunak’s fiscal conservatism is looking increasingly unfashionable on the Right of British politics.

Sunak appeared to be spooked by the criticism he received after the October Budget of being a high-tax Chancellor. He tried to address it but, short of pursuing a Reaganite approach to unfunded tax cuts – something contrary to Sunak’s fundamental beliefs – and taking a bigger axe to public services, it looks as if he will never win over his critics on the Right.

Meanwhile, his bigger problem with the country in the next few months is more likely to be the measures he did not take. The failure to protect Universal Credit will mean that Ministers will be regularly confronted by broadcasters with hard cases of benefit claimants failing to get by. Industrial relations with the public sector are likely to be grim as the Government seeks to impose substantial real term pay cuts. The Conservative hold over working class voters who switched to them in 2019 is likely to become even more precarious.

These are tough times for the country and tough times to be a Chancellor. Sunak appears to have targeted winning over the Conservative base, taken aim – and missed. In doing so, he has ended up pleasing no one.