Rishi Sunak tries to have it both ways as UK budget looms

LONDON — Trying to have your cake and eat it might be more commonly associated with Boris Johnson, but the U.K.’s chancellor will give it a go Wednesday.

Rishi Sunak will deliver both a normal autumn budget and a three-year departmental spending review as the economy grapples with Brexit fallout and counts the cost of coronavirus.

He will need to balance the demands of his own big-spending prime minister with his own hawkish fiscal instincts. And while he may just pull it off this time, there’s still plenty of danger ahead.

Sunak has achieved a rare feat in British politics — becoming a household name. He entered No. 11 Downing Street in February 2020, just a few weeks before the pandemic hit. He responded with a raft of unprecedented, costly emergency measures — support for wages, a boost to welfare and, later, a steep discount for restaurant meals.

These big interventions, plus a slick social media presence, helped the relatively young and inexperienced chancellor gain a strong public profile and become more personally popular than his boss, the prime minister.

Even as he upped public spending, Sunak’s long been keen to signal that there are tougher times to come. As he told the Tory Party conference last month: “There can be no prosperous future unless it is built on the foundation of strong public finances. And I have to be blunt with you that our recovery comes with a cost.”

He’s been unapologetic in cutting the U.K.’s aid budget and clawing back an increase in social security despite strong criticism from his own MPs. His department’s engaged in a tense public face-off with one of Sunak’s own Cabinet colleagues as he resisted any talk of bailouts for beleaguered energy companies.

Yet this week Britain’s news outlets have been awash with the traditional slew of pre-budget briefings, and they give the impression of a spending bonanza. There are promises of new money for the NHS, rail, early years support and a rise in the national living wage. Sunak’s colleagues on the Conservative benches hope there’s even more cash to splash on regional projects and green initiatives.

Nicky Morgan, a Conservative peer and former Treasury minister, said: “He’s a Yorkshire MP and he understands the politics of the red wall seats more than Treasury officials will. He and others will be saying we do have to give something to the red wall seats.”

The devil, as ever, will be in the detail. As Ben Zaranko of think tank the Institute for Fiscal Studies explains, most of what has been trailed so far relates to capital spending — not the day-to-day budgets for Whitehall departments that’ll be closely watched.

“Until we get the full picture we can’t assess how much of this is new or how many big shiny announcements are coming at the cost of something else,” Zaranko says. “The big thing will be can he rustle up enough cash to avoid having to make cuts to pandemic-ravaged services in the next year or two?”

One potential boost for Sunak could come from the Office for Budget Responsibility, Britain’s fiscal watchdog, which is set to publish revised growth forecasts that are widely expected to give him more room for maneuver.

Zaranko predicted “good news” from the OBR which Sunak could then use “to soften the edges and avoid the need for cuts to public services” in the spending review. 

The chancellor’s play for the fiscal responsibility mantle could, then, come in longer-term promises to bring borrowing down. He’s already set out an ambition to stop the government borrowing to fund day-to-day spending within three years, a vow that could be formalized as a set of fiscal rules Wednesday.

Keeping the neighbor sweet

For Sunak, balancing the books is not just about the sums but managing the relationship with his next-door neighbor and the Conservative Party at large.

Johnson’s big-spending instincts are well-known, and have already caused tension with Sunak. One Tory former minister said there had been fears in government Johnson would use the Tory conference to make an expensive, unfunded flourish — but that the PM’s apparent forbearance showed “the message has got through.”

In turn, Sunak “would not be able to get away with austerity mark two under this PM,” the same ex-minister said. 

Sunak has already gone through the pain of agreeing a tax hike to pay for health and social care, insulating himself from the backlash he could have faced this week, and lowering the prospect of other tax rises that could alienate his party.

As Jill Rutter, senior fellow at the Institute for Government and a former Treasury civil servant, points out: “It’s quite helpful to have got that out there in advance, otherwise I think it would have been dominating the reaction on the backbenches.”

Sunak has spent the past few weeks inviting groups of MPs to visit him with spending submissions for consideration, something that’s seen a savvy move from a politician frequently talked up as a serious contender for the next Conservative leader.

The Treasury will also feel empowered after sticking to its guns and not extending the £20 uplift to the Universal Credit welfare payment. The case made repeatedly by Treasury officials to ministers, and by Sunak to MPs, was that government could not afford for temporary measures to become indefinite.

Having forced this point, they may feel able to launch similar interventions again — for example on education, which will be closely watched in the budget.

Perilous path

Yet Conservative MPs representing low-income voters are unlikely to settle for long. They’re keen to highlight Johnson’s longstanding promise there’ll be no return to the austerity measures championed by Sunak’s Tory predecessors — and have been urging the chancellor to take more action on the cost of living.

“Every time a bill comes through the door, it’s like a slap in the face to workers,” one MP said. “If they increase the living wage that will be good and if they can do something on utility bills that would make a huge difference.”

While Sunak may find himself with some breathing space, the path ahead is still perilous. Whatever forecasts are produced this week will be subject to a high degree of uncertainty around potential knocks to the economy if coronavirus cases go up again, supply chain problems persist and inflation hits consumer confidence. 

Dedicating 40 percent of public service funds to the NHS could have knock-on effects elsewhere. “Even a relatively modest percentage increase in the NHS budget squeezes everything else because of its sheer size,” the IFS’s Zaranko says.

And if that doesn’t translate into massive cutbacks for other public services, the next few years could still be tight for some less politically sensitive departments such as HM Revenue and Customs, the Ministry of Justice — battling a huge courts backlog — and perennially-squeezed local government budgets.

While Sunak has the sense to know he cannot go into the next election with the NHS in its current condition, Rutter says it’s still unknown whether he’s “very fussed about the creaking criminal justice system, or the slightly second order bits of public spending.”

The chancellor has pulled off some difficult tricks since he took office — but this week he’ll have to reveal more of where his priorities really lie.

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