Rishi Sunak’s pivot to tax cuts reveals No10’s search for an economic argument

On Monday Rishi Sunak delivered a speech about his economic approach. It is unclear how much attention he wanted or expected it to receive. On the one hand, prime ministerial economy speeches are a pretty big deal, particularly from arguably the most economically switched-on resident of No.10 since Gordon Brown. On the other hand, this is the week of an autumn statement, a moment that the chancellor, Jeremy Hunt, must have been preparing for months. Not being able to take any of Hunt’s announcements, nor wanting to distract from Wednesday as the main event, the prime minister must have intended to bolster the chancellor somehow – but risks implying that his neighbour is in especial need of support this week. 

Downing Street’s current operation is too discreet for us ever to know. More interesting is what we have learned about Sunak and the argument he wishes to take into the last year of this parliament. 

Sunak is now discussing how to go about cutting taxes 

Memorable speeches about the economy are rare. The normal sort proceed by leaping along between artificial oppositions, while making a virtue of quite uncontroversial views. It is only in this kind of speech that “I believe in the opportunity to build a wealthier, more secure life for you and your family” is presented as a daring statement of values. A pious assertion that, in fact, it’s the private sector that grows the economy has become the “people are our greatest asset” of political-economic speeches, but many politicians nevertheless feel they must pretend their opponents are belligerently ignorant of this. 

Picking our way between the carcasses of such straw men, Sunak nevertheless afforded us some interesting insights. Apart from bringing down Boris Johnson, his most principled and courageous act in politics has been to face down his party on the subject of tax cuts – not only with words but real action. His decision to freeze income tax thresholds and hike corporation tax in March 2021, in order to attempt to fund public services properly, raised the temperature of his simmering tensions with Johnson and half of the parliamentary party. He stood by the decision all through the leadership campaign of summer 2022. That year’s autumnal bond-market meltdown added an aura of prescience to this stance. 

On Monday, after a weekend of suggestive briefing about impending tax giveaways, Sunak repeated his attack on “the idea we can simply cut taxes without a plan to pay for that”, but moved the discussion onwards into how this can be done carefully and sustainably. His argument – ironically, containing a faint echo of “modern monetary theory” – is that inflation is the key constraint. Now that it is on a decisively downward trend, it is right to consider a lightening of a historically-high tax burden. This helpfully drew attention to what the government sees as a signature achievement: its pledge to halve inflation in 2023 being fulfilled a month ahead of schedule. 

The OBR cannot police unrealistic assumptions about spending

But while a refusal to pour fuel on an inflationary fire is commendable, this is only one of the considerations necessary for a careful, sustainable tax cut. The Sunak of 2021 presented his tax-raising measures as necessary to fix the public finances, not keep a lid on demand-driven inflation. This year, revenues have come in significantly ahead of schedule, and this has fuelled talk of the chancellor having the ‘headroom’ needed to afford cuts. But taxes are higher in large part because inflation has proven more stubborn, generating more cash for a Treasury while public spending totals remain fixed. As we argued in August, it in effect means the exchequer benefiting from a stealth, real-terms cut to spending. It is highly questionable whether this is sustainable. Spending totals for the years ahead already imply real-terms cuts to unprotected areas of public spending, and the services so affected are already performing very badly. 

What we have really learned is what Sunak and his team think is a convincing argument to take to his restive backbenchers, most of whom understand that fueling inflation is a bad thing. But I would argue that they are also exploiting a failure in our fiscal system. The Office for Budget Responsibility is a very effective guard-dog against overly optimistic projections about the economy, but cannot easily police unrealistic assumptions about spending, except through coded words about the “risks to the fiscal outlook”. Politicians respond to the incentives this creates. Regrettably for the state of our public services, it encourages them to spend illusory headroom on tax cuts and confront public spending shortfalls too late. 

For me, this undercuts one of the major themes of the speech, which is an attempt to draw a line between Sunak’s responsible approach and the presumed lavishness of the opposition’s spending plans. 

The government is closer to Labour on economic thinking than Sunak would like

That important point aside, the rest of the speech reinforced the broadly Thatcherite stance that the prime minister wishes to take on the economy. His five promises – to cut debt (already in the fiscal rules), try to cut taxes, achieve energy security, support businesses and deliver world-class education – are not designed to surprise us; you cannot imagine anyone pledging the opposite. The prime minister gave us more detail about his broad philosophy on government intervention: he is there for us in an emergency like Covid, but thinks heavy investment for an emergency like climate change is a step too far. The alternative amounts to “the idea that someone in Whitehall can plan and direct the whole economy”. 

In truth, the government is less ideological than such political lines would suggest. Far from rejecting industrial strategy, the Treasury quietly announced long-term funding for manufacturing support on Friday. The government has useful strategy documents for life sciences, quantum computing, carbon capture and storage and more, and an Advanced Manufacturing Plan to come. There are strong hints that the full expensing of capital investment unveiled in March will be made permanent, which would be a huge boost to industry. Although the prime minister attacks the opposition’s plans to introduce new labour regulations, his government is quietly proud of how high it has raised the minimum wage. 

The awkward truth is that there are fewer sharp divisions across the dispatch box than the prime minister would like. In preparing for this article I perused a few of Gordon Brown’s speeches as chancellor under the last Labour government. Much of what Sunak said could easily have been delivered by Brown, and vice-versa. In my opinion this is a good thing; business would like a consensus on the policies that matter for investment. It may not suit the government, which needs dividing lines to build a political case. But it should not seek to create any through the pursuit of unsustainable tax cuts.