The Budget that betrayed Sunak’s Conservative instincts

For a man whose political idol is Nigel Lawson, Rishi Sunak’s most recent Budget did more than any in recent years to break with Thatcherite Conservatism. Whilst some Tories may have hoped the financial windfall from the faster recovery would be put into avoiding some of the significant tax rises that are yet to come, it appears that pressure from the PM has seen the Chancellor deliver £150 billion more in departmental spending over the next three years, a 3.8% real increase in spending and the “largest increase this century”.

This leap in public expenditure is a far cry from the austerity years of Cameron and May, where spending reviews saw the state clawed back for nearly a decade. As a result, it was judged by Michael Portillo, former Cabinet minister under Thatcher and Major, as “not Conservative”. Moreover, despite his own political and economic instincts, Sunak’s policies contrast heavily with the laissez-faire crusader Lawson and instead draw comparisons to Stafford Cripps, the Labour chancellor from 1947- 50, who rebalanced public finances with a series of tax rises.

On the surface, it seems like the Conservative Party has been entirely remoulded in the Prime Minister’s image.

It is on this point that the comparison is perhaps most striking. As a result of the Budget earlier this year and the subsequent National Insurance tax rise, the tax burden by 2026/27 will be the highest since 1950, rising by around £3,000 per household. Whilst not overly surprising given the mix of a fiscally conservative government and an ageing population, it did bury the low tax conservative image that had existed since the times of Margaret Thatcher. With freezes to income tax thresholds, increases in council, national insurance, corporate and dividend taxes, it’s perhaps no surprise that voters feel that the Conservative Party is more likely to raise tax than the Labour Party is. Yet not only was it a ‘tax and spend’ Brownite Budget, but it was also highly progressive. The Universal Credit taper rate cut of 8% coupled with the simplification of alcohol taxes and these tax rises have seen the Budget give a 2.8% boost to the poorest families in Britain, whilst the richest pay 3.1% of income more towards the recovery. On the surface, it seems like the Conservative Party has been entirely remoulded in the Prime Minister’s image.

However, the budget calculations aren’t that simple, predominantly due to the spectre of rising inflation and previous withdrawal of the Universal Credit uplift. The latter is already evident, given that a net of around £4 billion is still being cut from the benefits system even after the taper rate change due to the uplift introduced at the start of the pandemic being removed. Around 75%, or 3.2 million households, will be worse off after both these decisions, with the cut being worth around £280 a year on average. Moreover, IFS director Paul Johnson stressed that benefits next April go up by 3.1%, as per September’s inflation rate, which wouldn’t keep pace with the 5.4% inflation rate predicted by the OBR and as such, there would be a “hit of hundreds of pounds a year for many benefits recipients”.

Inflation is yet a further hindrance to rising living standards and family incomes. The rise in the minimum wage of 6.6% to £9.50 an hour is unequivocally a good policy that helps the least well-off, while easing the anaemic growth to real pay. However, real wages, which haven’t risen about the levels before the 2008 Global Financial Crisis, are likely to fall again in 2022. As a result, the UK is expected to have the weakest growth in pay this decade since the 1930s averaging around 0.8% a year. In fact, by the middle of the decade, average incomes are set to be almost 28% lower than at pre-2008 wage growth, worth around £9,000 per person. So it was perhaps a surprise that the Chancellor chose not to provide any specific help for families with their energy bills despite the rising prices.

How long that delicate balance can continue will likely depend on how soon Boris Johnson’s appeal and charm runs dry with his party’s grassroots.

Given the tight financial position for many families and the large increase in the tax burden, the growth in public spending is at least a substantial relief to many after years of austere government cuts. By 2024/2025, in real terms, since the Conservatives entered government in 2010, spending will have risen 8.3%, where health and social care and education up 42.4% and 2.8%, respectively. This is expected to enable per-pupil funding to return to 2010 levels.

However, the picture on spending isn’t entirely rosy, and whilst significant spending increases are expected, austerity is not set to be undone across government. Spending on departments outside of health and social care will still be down 8% in real terms, with the department of justice down around 12.2%. In fact, of the £111 billion in current spending increases since 2010, around 76% has gone to health and social care. This staggering figure shows how dramatically the health budget has risen to soften the impact of the country’s ageing population whilst leaving many areas of the state lacking in funding. Even within education, spending per pupil in further education will still be substantially below 2010 levels which the IFS has described as inconsistent “with a long-term growth strategy…or indeed levelling up”.

Overall, the Budget outlined the critical challenges for Labour in holding a government to account that seems to share more with the New Labour government of the noughties than the preceding Conservative governments of the last half-century. However, at a time of high inflation and a severe cost of living crisis, public backing for the spending review may soon turn sour as living standards stagnate further and criticism grows from both left and right. Yet, for the time being, the government appears to have appeased its newly won ‘red wall’ interests without upsetting too greatly that of the Tory shires. However, how long that delicate balance can continue will likely depend on how soon Boris Johnson’s appeal and charm runs dry with his party’s grassroots.