UK Chancellor Jeremy Hunt may have pledged not to return the UK to the financial austerity of the years from 2010 to 2019, but he announced on Thursday collective tax rises and spending cuts of £55 billion ($64 billion).
Hunt was appointed to the Treasury last month following the debacle of the Truss government’s emergency fiscal statement in September. That so-called mini-budget caused major economic and political problems for both then-Chancellor Kwasi Kwarteng and then-Prime Minister Liz Truss, with both of them forced out of office in October.
The political challenge that Hunt and new Prime Minister Rishi Sunak have to contend with is the loss of trust in the Conservative Party since the mini-budget, which capped off a difficult period for the party under Truss and her predecessor Boris Johnson. No UK government in the postwar era that has presided over a domestic or international fiscal or wider financial crisis, such as that of this autumn, has survived at the ballot box at the next election.
Take the example of the “Black Wednesday” crisis of September 1992, which dealt a significant blow to then-Prime Minister John Major. The UK government was forced to withdraw sterling from the European Exchange Rate Mechanism, a precursor to today’s European single currency, after a failed attempt to keep its exchange rate above the lower limit required for participation. Even though the economy improved over the next five years, the Conservative Party suffered a landslide election defeat in 1997 and did not return to power until 2010.
This historical context underlines how difficult it will be for Sunak to win the next general election, which would represent a fifth straight term of office for his party. Instead, polls indicate a growing possibility that the opposition Labour Party will prevail as the largest single party in the House of Commons.
It is in this very challenging political context that Hunt faces some very difficult economic choices. The UK economy appears weak and data released last week shows that it shrank by 0.2 percent in the third quarter of 2022, setting the nation on course for its quickest return to recession since 1975, with the economy having only come out of its last recession eight quarters earlier (in the second quarter of 2020).
The poor predicament of the economy reflects, in large part, the legacy of policy decisions taken by previous Conservative governments
The poor predicament of the economy reflects, in large part, the legacy of policy decisions taken by previous Conservative governments. This includes not just September’s emergency budget debacle, but also the specific post-Brexit economic model that has been adopted since 2016, which even leading Brexiteers like Lord Wolfson, a business CEO and Conservative life peer, have disowned in recent days.
This point was picked up on Monday by Michael Saunders, who left the Bank of England’s Monetary Policy Committee over the summer, when he asserted that Brexit has “permanently damaged” the UK economy and is one of the key reasons why the nation is now entering a new period of austerity, with the need for tax rises and spending cuts.
It is perhaps no coincidence that support within the UK population for the country rejoining the EU has been growing steadily over the past year, with one recent poll suggesting 57 percent are in favor of rejoining. This figure is the highest since before the referendum on EU membership in 2016.
However, with Labour having ruled out rejoining the EU, it is unlikely this will happen in the 2020s, or indeed in this political generation. Instead, the focus of the leading opposition party is much more about making Brexit work better for the UK, given the mess the Conservatives have made of it.
In a key speech this summer, Labour leader Keir Starmer set out a plan and pledged he would “deliver on the opportunities the United Kingdom has, sort out the poor EU withdrawal deal Boris Johnson signed, and end the UK’s Brexit divisions once and for all.”
Starmer argued that making Brexit work is essential because “you cannot move forward or grow the country or deliver change or win back the trust of those who have lost faith in politics if we’re constantly focused on the arguments of the past.” Rather than seeking EU membership, he stressed that the country must invest much more in British people and places to try to deliver on the potential the country has, while taking advantage of new freedoms, such as the ability to cut tax on energy bills.
All of this highlights what might be a significant shift that is underway in UK politics. After more than a dozen years of Conservative rule, the political pendulum appears to be moving away from the party in a way that may significantly reshape British politics for the remainder of the decade.
- Andrew Hammond