Published:

There are three main alternatives to the Spring Statement package that Rishi Sunak announced last week.  Two of them tell people what they want to hear.

The first is that the Chancellor should carry on taxing and borrowing into the never-never.  He shouldn’t aim to reduce debt from 83.5 per cent of GDP this year to 79.8 per cent of it in 2027, and borrowing as a percentage of GDP from 5.4 per cent this year to 1.1 per cent of of it in 2027.

This is the view from the Left, broadly speaking, and it would continue the course that Sunak took during the pandemic, and to which voters have become used.

The second is that he should carry on borrowing but not taxing: indeed, that he should cut taxes now – handing back all the £30 billion windfall he gained this year from tax revenues, rather than giving back only £5 billion and keeping £25 million to cover public spending commitments.

This is a view from the Right, at least in some cases, and it would sit easily with the prejudices of Boris Johnson himself, and his view of economics as a form of entertainment.

Telling people what they want to hear is always easy, but the consequences are sometimes painful.  So it would be certain to turn out in the first of these cases and likely to do in the second.

A country can’t tax and borrow its way to prosperity, snatching away wealth from this generation and heaping up debt on the next one, however much the Left believes otherwise.

But nor can it simply run up bills on the nation’s credit card – at least, when interest rates are rising.  Or the markets lose confidence in government’s capacity for self-control, and those rates go up, which is good for savers but bad for business (and therefore for workers).

So the question is where interest rates are likely to go.  During the pandemic, they were on the floor, so big tax cuts were practicable.  More recently, they have been rising.

If we are entering a period of stagflation, a development made more likely by the war in Ukraine, they will rise further – and the Chancellor’s room for manoeuvre will be even more limited.  The first law of conservative economics is spending control, not tax cuts.

Or that at least was the rule that Margaret Thatcher’s tried to live by, as Sunak correctly argued during the course of his recent Mais Lecture.

Indeed, the growth of the 1980s began after the Geoffrey Howe tax-raising Budget of 1981, not the Nigel Lawson tax-cutting one of 1988.  Howe’s aim was to ensure that interest rates stayed as low as possible – a decision which links that Budget of over 30 years ago to today’s debates.

Which leaves a third strategic alternative, and one which certainly tells people what they don’t want to hear: that growth in public spending must be scaled back further.

The Chancellor is pruning it back already: his decision not to boost departments’ three-year spending allocations in the Spring Statement in the face of inflation makes the settlements ten per cent less accommodating than they were five months ago.

My heart tells me that this is the path that either Sunak or his successor will have to take in order to prevent the tax burden from rising to its highest level since 1948.

Taxes are indeed too high, but the only sure means of reducing them is to ensure that tax and spending cuts (that’s to say, reductions in the rate of growth of spending) march in step.  So why won’t the Chancellor take this route?

There will be a number of explanations, not least the poor political timing as an general election approaches: the best time to cut spending is immediately after an election win – another lesson from the Thatcher playbook.

But the main reason is surely that Johnson wouldn’t let Sunak do anything of the kind.  So the Chancellor is stuck.

His options are to resign, therefore losing the Prime Minister his second Chancellor in four years, or to stick it out.

This made for an unstable background to the Spring Statement, the legacy of the pandemic and the reality of the war aside, and Sunak’s options were very poor indeed.  So this war statement was always likely to land less well than his Covid statements.

The Treasury will surely have foreseen the consequences of offering nothing much to people on lower incomes.

As David Willetts, an old Treasury hand himself, wrote on this site yesterday, “the department in its tidy-minded way thinks that it has already tackled the Spring increase in the energy price cap. The next moment for decision will be the Autumn increase in the cap.”

But the Chancellor may be forced back to the Commons in the interim if the political pressure for more help for consumers becomes too great for the Government to resist.

He has presumably foreseen this possibility and discounted it.  What he doesn’t seem to have anticipated is the raspberry given to his promise of an income tax later when the tax burden is rising now.

It was strange for Sunak to begin his statement with a solemn acknowledgement of the realities of war and then end with a long segment on his tax-cutting intentions.

I appreciate that the Chancellor wants to create “a new culture of enterprise”, which meant dwelling on his Tax Plan, and the cuts in tax that he announced were very welcome, especially the National Insurance thresholds rise.

However, the rise in thresholds could only be seen in the context of the rise in rates – as part of a continuing internal debate with Johnson over an increase that Sunak didn’t want.

It has left him protesting that he’s a tax cutter really – and in the context of the tax burden, and the unknowability of what condition the economy will be in come 2024, last week was a case of the lady, or rather the Chancellor, protesting too much.

Since the Office for Budget Responsibility “has said specifically ‘there is unusually high uncertainty around the outlook’ “, how can Sunak be sure of an income tax cut then?

For after all, he quoted the OBR himself near the start of this statement.  I find it hard to believe that the pressure for more tax cuts and public borrowing now comes from the mass of Conservative backbenchers.

Many are more likely to be orientated towards the demands of their constituents for more pandemic-type subsidies.

Rather, my instinct at the time of the statement was that Sunak was influenced by those in the Tory press who simply want tax cuts for the Tory base.  And a fat lot of good it did him, as David Gauke pointed out on ConHome earlier this week.

My sense was that the Chancellor would have done been better to stick to his solemn tone – and confirm that in the midst of war and the wake of pandemic his options are limited.

That he had a a few tax cuts to announce, but that the era of lower taxes must wait.  Nothing that’s happened since, including a photo-op that went askew, has suggested to me that I was wrong. Mind you, I hoist myself with my own petard in making this argument.

I write that Sunak should listen less to the views of journalists.  And here I am offering him a view…