Compression: how long will the pain last?

Rishi Sunak ushered in a new era of austerity, not just Osborne-style spending cuts, but also tax hikes. Its chancellor, Jeremy Hunt, says the plan is not just to balance the books but to control inflation, and so that will be the theme of the Sunak years: austerity 2.0.

Throughout the leadership campaign, Sunak repeatedly argued that persistently high deficits were no longer an option. Tough decisions lay ahead, he said, and claims to the contrary were “fairy tales.” Critics said it was a security-focused ‘treasury view’ and that Britain had ample room to borrow more. But Sunak was certain that the debt accumulated during the pandemic – not only by Britain but by countries around the world – guaranteed a wake-up call at some point. The call came when Liz Truss and Kwasi Kwarteng tried to keep the borrow and spend program going. Now Sunak and Hunt try to answer.

The solutions they come up with won’t be pretty. Britain appears to be entering a phase – under the Tories, no less – where taxes will continue to rise until growth trends improve. It’s not a sort of solution, because the first seldom leads to the second. Where will the growth come from? And is there an end in sight to misery?

It’s the missing piece of the puzzle that Sunak has yet to find, despite the urgency he makes. Hunt’s fall statement was accompanied by news that inflation hit 11.1% in the year to October, again beating forecasts. The Bank of England’s growth forecast extends to 2025, when it expects the UK to be the only major country whose economy has yet to recover to pre-levels. the pandemic. We’re not just looking at the worst growth rates in the G20 or Europe, but all over the developed world.

Truss defined his agenda as “grow, grow, grow”, while Sunak’s camp appears to embrace “tax, cut, wait”. There are strong arguments, as we learned during Truss’s short-lived premiership, for fiscal credibility to come first; tax cuts should only be given as a reward for getting the economy back in shape.

But the waiting period is going to be painful. The best paid will continue to contribute the most, with restrictions on pensions and tax rates monopolizing 47% of their income. But some workers earning much less will be worse off. A recent graduate earning £51,000 a year with outstanding student loans will pay a staggering marginal rate of 51%. It’s a big payday, no doubt – but many of those in London, for example, will pay up to half their after-tax income in rent.

Truss defined his agenda as “grow, grow, grow”, while Sunak’s camp appears to embrace “tax, cut, wait”.

Much of the fiscal pain will be caused by the “tax drag,” where workers are pushed into higher tax brackets that have not been adjusted for inflation. An additional 1.5 million workers can expect to find themselves in the 40% (or higher) tax bracket over the next three years, including teachers, nurses and police officers. In many cases, workers will pay more taxes while simultaneously taking a pay cut in real terms: the average worker will see their wages drop by 3%, because wage increases are below inflation. Another million part-timers – on £12,500 a year – will be dragged into paying income tax because of the frozen Personal Allowance threshold. Housekeepers, security guards, parents who work part-time to make ends meet, they too will be affected. Some of the Welfare at Work bonuses will allow someone on Universal Credit to keep just 45p of every extra pound they earn.

This is shocking because the ‘striving’ are supposed to be the core of conservative voters, but there is only a limited amount of tax the top 1% can expect to pay: they earn 13 % of all money paid in wages, but contribute 28% of all income taxes collected. If government spending increases, ordinary workers will pay. No political party – Conservatives or Labor – intends to squeeze everyone into every tax bracket; it is the consequence of having an increasingly interventionist state. The government machine is now 50% larger than it was under Tony Blair. Everyone has to pay more to keep moving forward.

Back when Sunak was at No 11, he asked: what kind of country does Britain want to be after Brexit? A country with less taxes and less spending, or a European-style social democracy with a tax burden similar to France and Germany? He preferred the former, but that was not his main point. He felt there was no honest debate about trade-offs; that under Boris Johnson the UK was drifting irresponsibly and irreversibly towards the model of big states, and if the Tories continued to make big spending promises, higher taxes would inevitably follow. Britain would, he believed, become a European big spender by default.

In order to avoid this drift, Sunak often tried to make the barrier between the requests for more money and the green light. “In my experience, he was always the one who stopped the most spending,” said a minister. “I respected that, but a lot of my colleagues didn’t.” This is one of Sunak’s biggest political problems right now, both with his fellow MPs and with the public. It’s not politically popular to turn down more money, especially when the country has been addicted to cheap money for so long.

Sunak may be able to start turning the tide of ever-higher taxes and ever-greater public pain

Sunak became known in some circles as the ‘undertaker’ of the summer leadership campaign as he showed up at hustings to deliver grim news about the health of public finances and the economy British. His diagnosis was one that many people, both inside and outside the Conservative Party, didn’t want to hear – not least because Sunak has a decent track record for predicting these things. He was one of the only politicians in the UK to prepare people for the possibility of inflation. His warnings about Truss’ economic plans were also quickly vindicated.

But the mission is no longer just about correcting the mistakes of the Truss era. If so, Sunak and the Chancellor would have a fairly easy job: their arrival in Downing Street quickly brought borrowing costs in the UK back to where they were before the mini-budget. What these 44 Days of Truss assured, however, was that the UK would be the first major country to be singled out by newly resurgent bond markets and to have to pay the price for the unaffordable spending promises that were made before and during the pandemic. .

Sunak suspected, when he reluctantly agreed to the repeated closures, that they would cause long-term economic damage. Privately, he admits he hadn’t anticipated that so many people, especially those over 50, wouldn’t return to work. While early retirement is a post-pandemic global trend, Britain is the only advanced economy in which levels of economic inactivity (i.e. people who are not working or looking for one pas) steadily increased even after the shutdowns ended.

It may not have been officially declared yet, but Britain is probably already in a recession – a recession made worse by the fact that a million people have left the labor force.

Earlier this week, new figures on the number of people receiving benefits were released, not via a press release, but on a password-protected government website. It turns out that the total number of applicants is 5.2 million. The depth of the problem in many UK cities is severe: Blackpool, Middlesbrough and Liverpool have unemployment rates for working-age adults of 24%, 22% and 20% respectively. Some of these people have long-term health problems, but not all of them. Considering job vacancies are at a near-record high nationwide — more than 1.2 million — it’s possible this recession will be very different from previous contractions. It’s not that people can’t find work, but that a flawed welfare system encourages many to stay at home.

The numbers are usually buried in Westminster and updated with a six-month lag. There is growing recognition in Sunak’s cabinet, however, that this government needs to address the issue of how to transform benefit claimants into good health and of working age – some of whom are estimated by Whitehall to cost the taxpayer £15,000 per year – into people who instead pay taxes themselves.


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Sunak has often lamented the lack of a civil service reform program under Johnson. In November 2020, he led an attempt to permanently roll back the “triple lockdown” of state pensions after the shutdowns. Now was the perfect time, he thought, to tackle the intergenerational injustice of pensions politics, especially given the sacrifices young people were making during Covid. Sunak managed to rally the cabinet members, but ultimately the plan fell through when Johnson crushed him.

Last December Sunak spoke out against the cult of the NHS at cabinet meetings, after it became clear that the additional billions pledged to the service this fall were not going to produce better outcomes for patients. He was disconcerted to learn that even after the cash increase, waiting lists were expected to grow from six million to more than nine million.

As prime minister, Sunak has the power to launch his own reform agenda, one that could eventually begin to turn the tide of ever higher taxes and ever greater public pain. But with the next election perhaps 18 months away, the question is whether he has the time – or the political capital.

“The lesson of the past few months is small steps,” said a government insider. “Politically, you can’t raise taxes and get the public finances in order alongside other major reforms. Not if the Conservative Party is going to be here in a few years. In other words, the economy is obvious, but politics is tricky.

“Will the cure be worse than the disease? This will determine Sunak’s legacy,” says a former minister. This is the bet that Sunak and Hunt have decided to make: finally facing the rising costs of all these promises will pay off in the medium term. But that assumes something that seems, at the moment, a bit of a stretch: that after such a tough fall statement, the Tories will be there for a middle ground.

About Alma Ackerman

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