Tension between Boris Johnson and Rishi Sunak over spending isn’t necessarily a bad thing

The issue, writes Hamish McRae, is that the chancellor needs luck – and the PM needs discipline – for all of this fiscal maneuvering to work out

Boris Johnson, left and Rishi Sunak (Reuters)

Boris Johnson and Rishi Sunak are said to be at loggerheads over the government’s spending splurge. That’s a surprise, isn’t it? The prime minister is not known for his financial orthodoxy in his own dealings, while the chancellor was independently wealthy through his career in finance.

But this is not just about personalities. The very nature of the two jobs creates tension, as it should. You need someone with acute political antennae for what deep down a majority of voters want. And you need someone to make sure the sums add up. That makes for tension.

That tension can be productive, as it was in the early years of the Tony Blair/Gordon Brown government, or destructive as that partnership became as time rolled by. There probably was not enough tension between David Cameron and George Osborne, which made it hard to sustain political support for the years of relative austerity, however necessary it was to get the country’s finances under control.

Actually, what happens now will depend on numbers rather than personalities. The past 18 months have, in public finance terms, been akin to a wartime experience. You just spend the money. You do whatever it takes. The deficit goes up to £300bn. The national debt goes from 80 per cent of GDP to just under 100 per cent. But that surge combines two things. One is the extra spending and loss of revenue from the pandemic. The other is the longer-term impact on public finances from other decisions.

One is a one-off; the other ongoing. One the past; the other the future. The tension now between the PM and the chancellor is about the future.

There is one specific issue that has to be settled in the next few months, and a string of further ones. The specific issue is what to do about the so-called “triple lock” on the state pension – the government’s commitment to increase pensions by the rate of inflation, by average earnings, or by 2.5 per cent, whichever is highest. It is an expensive policy given the rise in the projected number of pensioners, but defendable on the grounds that while it has gone a fair way to eliminating pensioner poverty, UK state pensions are still not high by European standards.

The trouble this year is a distortion. Average earnings were depressed last year by the pandemic so this year they are increased in percentage terms by the low base of 2020. The latest increase works out at 5.6 per cent, which if followed through would add another £4bn to the pension bill each year. However if you allow for the distortions the underlying increase is more like 3 per cent.

An extra £4bn may not sound a lot in the wider scheme of things, but it adds to the base for future years. So you can understand why the Treasury is anxious to find some way of trimming the numbers, perhaps by taking an average increase in wages rather than the headline figure. But this is just one of a string of issues coming up. Every department is clamouring for more money.

There is the plan devised by Sir Andrew Dilnot to cap care home costs at £50,000 per person back in 2011, which is eminently sensible and politically attractive – why should people have to sell their homes to pay for care just because they have the bad luck to have some long-term illness in their old-age? But it costs money.

There is the entire education sector under pressure, including the need to help pupils who have lost out from the pandemic. There are headline issues including the new royal yacht. And the NHS will need more funds as it struggles to catch up with the backlog of operations and other treatments.

So you put up tax rates? Actually tax revenues have been quite strong in recent months, a sign that the economy is recovering faster than many (including the Office for Budget Responsibility) expected. That is a ray of light. But raising more money – as opposed to raising headline tax rates – is difficult. Total revenues are around 36 per cent of GDP and will nudge up a little as the economy recovers. But not much. Indeed you have to go back to early 1980s, when North Sea oil revenues were booming, for the government to get more than about 37 per cent of GDP in tax and other income.

So the government has to ask “are voters prepared to pay more of their income in tax than they have had to do than at any time for the past 40 years?”

What gives? My guess that with good growth and a bit of luck we can get through without significant increases in taxation. And with better management the costs of public services can be contained, so that another percentage point or so of taxes will enable the government to scrape by.

Bottom line: Sunak needs luck and Johnson needs discipline. Otherwise this story will not end well.