For Rishi Sunak, the problems are only just beginning

He’s incredibly popular among MPs and activists and widely tipped as the frontrunner to take over from Boris Johnson. But, as Sean O’Grady explains, the chancellor faces a series of tough decisions that could yet hamper his ambitions

The very schemes that delivered him such affection among the voters – furlough, ‘bounce back’ loans, various tax reliefs – are about to expire (AFP/Getty)

It’s fair to say Rishi Sunak has enjoyed a pretty good press over the past year or more. His schemes to support the economy, supported by the Bank of England, have worked, broadly, against the double whammy of Brexit and Covid. Borrowing has reached wartime levels but few seem to care, and inflation has not (yet) taken off, or sterling collapsed. His personal ratings have shot up among MPs and party activists, and the voters seem to like him too. Pointedly, they contrast with the prime minister’s decline into trolley-like aimlessness. Now he is in a position to welcome a remarkable rise in national income over the April to June quarter, of some 4.8 per cent – nearly 20 per cent on an annualised basis. He declares, predictably, Britain is “bouncing back” with the highest growth among comparable economies. Pointedly, he fails to dispel speculation he fancies the leadership of his party.

He should watch it.

Apart from incurring some prime ministerial envy and irritation (Sunak was, after all, installed as a more pliant replacement for Sajid Javid), Sunak’s real problems – economic and political – are only just beginning. The very schemes that delivered him such affection among the voters – furlough, “bounce back” loans, various tax reliefs – are about to expire. The Bank of England thinks inflation will hit 4 per cent before long and, while it might be inclined to “see through” temporary factors, this may not last if the situation fails to right itself, and a wage-price spiral starts up. Then interest rates, at extraordinarily and historically low levels since the banking crisis in 2008-09, will begin to edge up again, eroding consumer confidence. All of these risks spell danger for economic growth, and the fact is that the UK economy remains smaller than it was before Covid and/or Brexit. Both of those events, or processes, will have a lingering and dampening effect on trade, productivity, employment, and investment – and the latest GDP figures confirm that private sector investment (key to boosting productivity and wages) is anaemic.

Weak growth is also bad for the tax take and the public finances. And that means “tough choices”, as politicians are apt to say. That means none of them are good ones, from a political point of view. It is crude, but Boris Johnson, the broken shopping trolley, at least knows that veering off in the direction of tax hikes and spending cuts is no way to win the next general election. Sunak seems to think he can make precisely such an approach work, and believes it will pay political dividends, and, in any case, the potential alternative of spiralling inflation and interest rates would be worse for the economy, and shred the Tories’ (arguable) reputation for economic competence.

None of the measures open to Sunak in the comprehensive spending review and the next Budget look electorally lovely: cutting the £20 a week universal credit uplift; suspending the “triple lock” guarantee on rises to the old age pension; reducing tax relief for the middle classes; finding and finding a workable reformed system for social care; paying for educational catch-up; supporting the NHS in its continuing crises; huge infrastructure projects such as HS2; making any sense and substance out of “levelling up”, thus far an empty slogan; the scheduled increase in defence spending; the costs involved in delivering climate change targets; and devising a replacement payment to farmers to replace the Common Agricultural Policy. Tax and national insurance rises look inevitable, whatever may have been said or implied during the 2019 general election campaign. The chancellor will probably also have to carry on borrowing for a few more years, in the hope that the economy will eventually return to its pre-Covid and pre Brexit trend growth rate.

Each and every option open to Sunak will hurt one or more core groups of voters that delivered the Tories their last election victory – pensioners, “red wall” defectors, the middle classes, farmers… and who will they blame? Sunak seems a pretty obvious target for their anger and resentment. His enviable approval ratings would not last such an onslaught in the living standards and expectations of many Tory voters. That doesn’t mean they’ll turn to the Labour Party, or that they’ll treat Johnson particularly kindly; but it does mean that Sunak’s ambitions will run into some unfamiliar headwinds.