Sunak Wins Over the Markets. Voters Are Another Story

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Two short letters have become famous in the political history of the United Kingdom for their candor about the state’s finances. Reginald Maudling, the outgoing Tory chancellor in 1964, told his Labor successor and friend, Jim Callaghan, “We’re sorry, old cock, to leave him in this shape.” In 2010, Liam Byrne, the Labor Chief Secretary to the Exchequer, offered a false excuse to his Liberal Democrat successor, David Laws: “I’m afraid there’s no money.”

Their opponents had their stories hanging around their necks, but both had the ring of truth. Successive governments were impressed by the eloquence of their predecessors. Today’s opposition Labor party should remember them as a warning.

With the Office for Budget Responsibility predicting that UK living standards will fall by 7% over the next two years (the steepest drop on record), the odds show that the Conservatives will win the election in two years’ time. The Office for National Statistics estimates that wage increases can easily be overcome by price increases and that the recession will last for a year. Middle income earners – many of them Tory voters – will be in charge of the tax rises announced in Thursday’s Autumn Statement.

Prime Minister Rishi Sunak, a former Goldman Sachs Group Inc. banker, has won the respect of markets for his fiscal conservatism, but he is struggling with voters. He despises “being in touch” and “understanding the lives of ordinary people.” Maybe we’ll see less of his Prada loafers and expensive office clothes. The personal is forever political. Sunak’s vast private wealth and his wife’s former non-resident status (which exempted her from taxes on her overseas income) make them attractive targets for Labour.

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Sunak also lacks the X-factor appeal of former Prime Minister Boris Johnson and many former Labor voters who enjoyed his political class. These switchers may return to their old loyalties in the next election. The Conservative party is disappointed. His favorite paper, The Daily Telegraph, asks what the point of the Tory vote is if they raise taxes and reform the public sector. The Institute of Economic Affairs, the UK’s leading free-market think tank, is calling on the government to “manage the decline”.

If the Tories lose, Sunak’s serious chancellor of the exchequer, Jeremy Hunt, will not fall into the trap of writing a tongue-in-cheek transition note to his likely successor, Shadow Chancellor Rachel Reeves, a former Bank of England economist . But the unspoken message will be the same: There is no money.

Labour’s 20-point lead in the recent polls has put a spring in the party’s ranks, although an election victory cannot be taken for granted, given the high number of seats Labor needs to win for a clear majority. If they succeed, however, Reeves and her leader Keir Starmer will have to contend with a terrifying Tory legacy. Hunt’s £55 billion fiscal push postpones many public spending cuts until after the general election expected in late 2024.

A centre-left party that has historically supported generous public service provision will find the piggy bank empty. How will Labor make a difference if it cannot fund a growth strategy? Their ambitious Green Prosperity Plan, unveiled in September and carrying a hefty £28 billion price tag, looks fragile under current economic conditions. Will Labor just manage the decline too?

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Long before any general election campaign is due, traps are being laid for Labour. Hunt can challenge Reeves to accept his plans or outline how she will get the money to reverse them. As Reeves herself noted in her scathing response to Hunt in the House of Commons, “the Tories want a party like it’s 2010.” That year, Chancellor George Osborne cut budgets and challenged Labor to say how they would balance the books. Osborne, not coincidentally, has been invited back to Downing Street to give advice on how to snooker the opposition.

But the last time Labor set out another budget — before the 1992 election — the party was defeated, despite being tired of 13 years of Tory rule. The Conservatives and their allies in the press warned against the coming opposition “double tax environment” and Labor had no response.

Reeves and Starmer have taken a different path. Labor has sought economic competence for the Tories for the past 15 years. Recent market turmoil has given them the upper hand in the polls, but it may only be temporary — due to the Tory prime minister’s unfunded package of tax cuts.

Labour’s Tony Blair and his Shadow Chancellor Gordon Brown faced the same dilemma in the 1990s. The Tory government of the day was beset by divisions, scandals and recent economic failure. But voters still needed to be convinced that their money would be safe in Labour’s hands, even as a large majority wanted to spend billions on rebuilding schools and hospitals that had suffered.

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Reeves has chosen to emulate Blair and Brown, promising that the Labor government will not borrow to fund day-to-day spending. She even supported the Tory cut in the basic rate of income tax before it was dropped a few weeks ago.

But there is a big difference between Labor then and now. In 1997, the Tories committed sound finances to Blair and Brown amid a long post-Cold War boom. Inflation was low and the price of manufactured goods was falling due to globalization. Today, globalization is in reverse, war is on the doorstep in Europe and rising interest rates on government debt have left a black hole in the Treasury accounts. The tax burden has soared to heights not seen since the Second World War.

We are that much closer to Britain’s stuttering “stop-go” economy and Byrne’s miserable post-recession confusion. The OBR’s optimistic hope for steady growth in 2025 is promising. But Labor can’t bank on that just yet. Most likely, there will be “no money.” The path back to power for the opposition party will be resolved with penury.

More from Bloomberg Opinion:

• Deadly Silence on UK Housing Budget: Therese Raphael

• The UK could use a World Cup win — for the Economy: Andrea Felsted

• The UK already has a Narrow Wealth Tax: Merryn Somerset Webb

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Ivens is the editor of the Times Literary Supplement. Before that, he was editor of the Sunday Times of London and a leading political commentator.

More stories like this are available at bloomberg.com/opinion

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