NewsEuropeRishi Sunak's last chance to right a lost decade in the UK

Rishi Sunak’s last chance to right a lost decade in the UK

The last chance to rescue the economic credibility of the United Kingdom, and the reputation as a good manager of the Conservative Party, is in the hands of an unlikely couple that British politics had written off just two months ago. “Some are born great; there are those who conquer it; and to others greatness comes upon them”, said Shakespeare’s Malvolio in King’s Night. The Prime Minister, Rishi Sunak, and his Economy Minister, Jeremy Hunt, present a fiscal plan on Thursday, rather a new budget, to try to convince the markets that their country is not the sick one in Europe. The rigor and honesty of some measures —tax increases and spending cuts— that must begin to cover a hole in the public accounts that some experts place at almost 70,000 million euros will depend on whether Sunak and Hunt achieve that greatness or end up being the protagonists of the final failure of more than a decade of the toriesas British Conservatives are historically known, in the power.

“I am a Conservative Party Chancellor of the Exchequer, and I am being quite explicit in warning that taxes are going to rise. Something that is quite difficult for me, because I entered politics precisely to defend the opposite idea, ”Hunt assured this week on the BBC. “I will be honest, I will try to be fair and I will try to make our plan balanced,” he promised.

The response of the Sunak government to the uncertainty and panic unleashed by her predecessor, Liz Truss, when she announced a historic tax cut – more than 50,000 million, without explaining how this relinquishment of income was going to be compensated – is an act of contrition. But it is also a laboratory test that the rest of Europe will be aware of.

Because Truss’s ill-fated plan was nothing more than, as the English say, the last straw to break the camel’s back. That is to say, the irresponsible drop that broke the camel’s back about to overflow: galloping inflation (10.1%); rising interest rates (3%); strikes in the public sector due to the lack of an income agreement; a stressed job market, unable to respond to demand; an energy crisis that made it necessary to allocate tens of billions of euros in direct aid to families and companies; a looming recession; and finally, as a unique and genuine product, a Brexit of which the advantages are not yet known, but which has introduced desperate friction in British export companies.

Some of these problems are autochthonous —Brexit— and some are more serious than in neighboring countries. The United Kingdom is the only one of the G-7 group, the most advanced economies in the world, that has not returned to its economic level before the pandemic. Other ailments, however, are shared, and the fiscal response of the Sunak government will be closely watched. Return to the austerity of the years after the financial crisis of 2008? Or austerity 2.0? In other words, a return to fiscal orthodoxy, but in a more tempered and socially just way.

Because, paradoxically, the temporary madness of Truss and his Finance Minister, Kwasi Kwarteng, consisted in defending growth based on tax cuts for the highest incomes and for companies, freed from the shackles of the fiscal orthodoxy they despised. They were neither going to bow to the Bank of England’s suggestions nor willing to submit their plans to independent scrutiny by the Office for Budgetary Responsibility (OBR). Markets responded in alarm, with sterling and long-term UK Treasury bonds plunging. Such was the blow to the UK’s economic credibility that Sunak and Hunt are now forced to make far tougher decisions than would have been necessary before that disaster. “Buzzwords are again stability Y confidence. Not only has orthodoxy returned, but it has done so with a vengeance,” said Nick Macpherson, the senior official who, as permanent secretary of the Treasury, ensured budgetary rigor during the Labor government of Gordon Brown and the Conservative of David Cameron. “A party that had been in power for more than 12 years had to find new dragons to slay in order to build its new Jerusalem,” MacPherson recently quipped about Truss and Kwarteng’s plan, at a conference for the think tank Strand Group in Edinburgh.

Return to fiscal discipline

Sunak – who was Minister of Economy with Boris Johnson – and Hunt accumulate meetings in recent weeks to prepare their fiscal plan. Seven days before the public presentation, they have sent the measures designed to the OBR, so that the independent fiscal responsibility agency can accompany the Government’s announcement with the corresponding analysis and forecasts. It is about regaining credibility at all costs. Some leaks about a report kept under lock and key, like the one revealed by the Financial Times, paint a grim picture in which the British Treasury would increase its debt by 113,000 million euros in the 2026-2027 period, compared to the 36,000 previously calculated by the OBR. That is to say, a hole of 77,000 million that Hunt should begin to cover as soon as possible.

Since the Gordon Brown era, the British government has imposed fiscal rigor on itself —with some flexibility— through plans —spending paths— that usually last three years. Brown established the rule that debt should never exceed 40% of GDP. The latest Treasury plans aspire simply for liabilities to sustain a downward trend as a proportion of GDP at the end of the term. And it is not necessary that the plan be triennial. It could be five years, an option that would allow Hunt to delay the most painful decisions until after the elections, due in late 2024. Any suggestion of austerity at a time when the British are suffering a huge cost crisis in their domestic economy of life would sound alarm bells among conservative deputies, and would unleash criticism from some analysts who fear that the remedy could be worse than the disease. “The biggest danger we face now would be making the decision to demonstrate fiscal credibility by adopting a very restrictive fiscal policy, reducing aid to the poorest households or holding back key elements of public investment”, warns Jagjit S. Chadha , director of the National Institute of Economics and Social Research.

An excessive delay in the necessary measures runs the risk, however, of arousing skepticism in investors and once again worrying the markets.

invisible taxes

Hunt keeps repeating that taxes will go up for everyone. The most subtle method of achieving that without unleashing the wrath of conservatives would be through what in tax jargon are known as “invisible taxes.” The minimum exempt income is now 12,570 pounds (about 14,300 euros). From an income of 100,000 pounds (about 114,000 euros), for every two more pounds that are collected, they deduct one from the exempt minimum. In other words, when collecting 125,000 pounds, that minimum disappears and the full amount of the income is quoted at 40%. Normally, the exempt minimum is usually updated with inflation. If the Government does not do so, and average wages in the private sector rise by the 6% predicted by the National Statistics Office, tax collection will increase without the need to announce a tax increase.

“That everyone is going to pay more taxes can mean anything. From keeping the exempt minimum frozen to introducing new tax figures, such as resuscitating the increase in Social Security contributions [las aumento el Gobierno de Johnson. Anulo la decision Liz Truss]. Although if it really is going to be an increase for everyone, the only way to do it is by raising VAT”, says Paul Johnson, director of the Institute for Fiscal Studies.

Measures for the most vulnerable

One of the first decisions that Hunt adopted as soon as he took over the reins of the Ministry of Economy was to reduce the scope of direct aid to families and companies to deal with the gas and electricity bill. The Truss Government’s announcement implied a general outlay of almost 150,000 million euros, without discriminating between users, and directly generated the same amount of public debt. With the rectification, the universal aid will be maintained until April – to spend the winter. From that moment on, the subsidies will be more selective and progressive, focusing above all on the most vulnerable households. It is also highly probable that the British Government will once again resort to an extraordinary and temporary tax on the “profits from heaven” of some energy companies that have seen their income statements skyrocket thanks to the crisis unleashed by the war in Ukraine.

In addition to cross-cutting efficiency measures, to freeze investment in all government departments, Hunt must decide what to do with civil servant salaries. Everything suggests an increase of more than the 2% expected, but less than 6% in the private sector. And something similar should be considered with social aid and benefits. Another issue is public pensions, whose increase is guaranteed by the “triple lock.” They must always rise according to the highest of three figures: inflation, the average salary increase or 2.5%. Sunak has promised to respect this rule.

Some media, like The Times, point to a rise in the minimum wage, and even direct aid checks for the most vulnerable families. Gestures of selective solidarity, no universal aid.

The elephant in the room

Sunak was a fervent early-stage Brexit advocate. Hunt was a Conservative supporter of remaining in the EU, and went so far as to call for a second referendum after the one in 2016. But “the B word” has become a taboo in British politics, the elephant in the middle of the room that everyone—Conservatives and Labor—avoids without looking. “I do not accept the premise that Brexit will make us poorer (). I do not deny that a decision like that has had costs, but opportunities have also arisen. What has happened is that, within a few months of leaving the EU, we have suffered a historic pandemic that has delayed the necessary process of determining what those opportunities were. Now we need to do it”, defends Hunt with the faith of the convert.

Conservatives are unable to face that reality. 16% less exports to the EU —which in some products reaches 50%—; 20% less imports from the continent (according to the Institute for Economic and Social Research). Much higher commercial costs for companies. Customs friction and an unbearable bureaucracy. Brexit has been the aggravating factor in an economic management full of black holes and decisions that are more ideological than practical.

In the midst of an increasingly worrying global crisis, the world is watching the United Kingdom, to see if it is rowing in the same direction as the rest or is definitely an island adrift.

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