Sunak’s fiscal dilemma

By Gareth Jones

The Budget is just under six weeks away. It is unclear how the country will be emerging from current lockdown restrictions by that point, but nevertheless, as we head towards 3^rd March, the Treasury and Number 10 will be facing a series of very tough decisions about public spending. 

The economic package that the Chancellor, Rishi Sunak, unveiled at the start of the pandemic was, by any comparable standards, immense. The vast furlough scheme, loans for businesses, support for the self-employed and extended support systems like Universal Credit rise were all deemed vital to give businesses and households a lifeline in the face of serious health and economic consequences of the pandemic. But these have come at great financial cost - all contributing to the £400 billion worth of public borrowing in this financial year – and have lasted longer than most had anticipated back last Spring (for example, it is worth noting that the furlough scheme was meant to end last October).

One of the key challenges facing the Chancellor and the Treasury is how and when to phase out these support packages as the economy returns to something close to normal. In theory, this would closely mirror the easing of restrictions as the infection rate is brought under control and the vaccine is deployed. In practice it is likely to be more complicated than that – due to a number policy and political factors.

At a policy level, even as we emerge from the worst of the health crisis, the big economic challenges are still likely to be ahead of us. Rising unemployment is a big concern, as well as the viability of businesses in hard-hit sectors, such as hospitality. There is currently a big debate about how ongoing business support should be delivered (for example, the successor scheme to the current Coronavirus Business Interruption Loan Scheme (CBILS)). There is recognition that many parts of the economy will require some sort of support long after the current lockdown restrictions end to prevent excessive long-term damage.

There are also significant political factors in any decision-making about spending. The impact on household incomes will undoubtedly be major factor in ongoing support for the government. It is, perhaps, one of the key factors as to why the Conservative Party's support has held up reasonably well in polls, despite the many criticisms it has faced in managing the pandemic. Furlough and support for the self-employed has provided direct support to one in three workers in the UK – a huge factor in people’s lives and explains why Rishi Sunak remains the most popular UK politician . In addition, measures such as the uplift in Universal Credit has a bigger impact on the Conservatives’ target seats in the North and the Midlands than elsewhere. Families are 50% more likely to lose out from scrapping the £20 a week Universal Credit uplift in the Red Wall regions than in the South East.

This explains why Labour have been so keen to seize on any sign that the government may be cutting this direct support. On Monday, an Opposition debate on Universal Credit, led by Shadow Work and Pensions Secretary Jonathan Reynolds MP, caused noticeable discomfort on the government benches with a number of rebellions and a less-than-clear response on the future of the uplift (with the Treasury stating that "all options remain on the table and no decisions have been made yet"). Further criticism came from former government official Louise Casey, accusing the Conservatives of returning to being the ‘nasty party’ if it cuts the £20 a week uplift at this time. 

Yet on the other side of the argument, there is noticeable unease from parts of the Conservative Party and the broader centre-right who are increasingly concerned that the current government is unable to defend itself against any call for more (or continued) public spending. This concern has been voiced in parts of the media and through Conservative-aligned think tanks in the past week (such as this Interesting thread by CPS Director, Robert Colvile). There is a fear among fiscal conservatives that many temporary spending measures will ultimately become permanent – and that the importance of maintaining sustainable public finances is no longer recognised as a political priority. There is also perhaps a growing suspicion that the Prime Minister lacks the fiscal discipline or required ideological conviction to resist calls for more spending -- whether it is from the Labour Party or Marcus Rashford or any other campaigner.

This debate provides some of the political backdrop to the Chancellor’s statement on the 3^rd March and highlights the dilemma Sunak faces on a large number of spending decisions. Sunak will need to utilise all his political skill to secure support for a plan that maintains economic recovery and protects household incomes while demonstrating commitment to long-term sustainable finances.