With the cost of living rising, Rishi Sunak faces a political balancing act

Rishi Sunak works under the watchful eye of Nigel Lawson – a portrait of Margaret Thatcher’s tax-cut Chancellor in his office serves as a daily reminder of what kind of politician Sunak would like to be.

But Sunak, who is delivering his spring declaration on Wednesday, takes office at a time when he is under pressure to spend and borrow more, first because of Covid-19 and now to help families struggling to cope with the rising cost of living cover up.

Taxes apply under Sunak the highest level in 70 years. And next door is Boris Johnson, the Prime Minister. “The boss wants to spend more and more money,” sighed one of the Chancellor’s colleagues.

Sunak is on track to become one of the largest tax registrars in post-war UK history, with the tax burden projected to rise to 36.2 per cent of GDP by 2026-27, according to the Office for Budget Responsibility.

Its daunting political task from Wednesdayis to find a way to help people facing a crippling cost of living crisis without undermining the fiscal discipline he believes must accompany any tax cut in the future.

The Chancellor’s determined response to the Covid-19 crisis in 2020, including the creation of the furlough scheme, earned him tremendous popularity, with his approval rating hitting 43 plus in April 2020.

But as the pandemic plans came to an end and Brits faced the bill – including the £12billion increase in Social Security in April – Sunaks Approval ratings fell to minus 2 in February.

Line chart of tax revenue as a percentage of GDP (%) shows that the tax burden is projected to reach its highest level in over 70 years

Tory activists have also shown signs they are no longer falling in love with the so-called “low-tax Chancellor”. In April 2020, he enjoyed a record rating of plus 94 and topped a ConservativeHome Cabinet league table; Today he is the 11th most popular minister with a rating of just 38.

Sunak, who harbors leadership ambitions, knows he must start cutting taxes, but like he said his corn economics lecture Last month, his hero Lawson got spending under control before he started. He pointed out that Lawson and Thatcher fans were “perhaps less quick to remember that they didn’t start cutting taxes until the deficit was under control.”

Tensions ran high between the spending-loving Johnson and Sunak earlier this year the “partygate” saga about Downing Street parties during the Corona restrictions. The Chancellor feared the Prime Minister would reverse the proposed NI hike to win support from Tory backbenchers, while believing the hike was essential to bringing public finances under control.

“It was all to survive,” said a senior Conservative who was about to negotiate between Sunak and Johnson at the time.

Sunak’s allies say Johnson’s “shadow flogging operation” – his closest allies tasked with saving the prime minister’s job – suggested the NI surge could be reversed, but the chancellor declined.

Johnson was also furious at Sunak’s alleged lack of loyalty, particularly his slowness in publicly supporting the prime minister at the moment of greatest danger during the Partygate scandal.

Sunak had chosen this day to travel to Ilfracombe in North Devon. Some in Number 10 believed the chancellor was ready to undermine Johnson without having the courage to take on him. “Rishi is basically crap in politics. He had a moment to strike and didn’t use it. He’s seriously weakened now,” said a Johnson ally.

The Prime Minister’s position is now safer as political attention has shifted from the Downing Street parties to the tragedy in Ukraine. “The war saved him,” said a cabinet member.

But Johnson’s confrontation with political mortality earlier this year has laid the groundwork for an uneasy truce – for now – as both want the same thing, according to some close to Sunak.

Among the prime minister’s harshest critics are the right, who have demanded lower taxes as the price of their support, and Johnson needs to deliver to shore up his own position. Sunak, the pretender, has the same goal.

In view of the country’s high level of debt and rising interest rates, more loans are not an option, argues the Chancellor. He believes the Prime Minister now agrees.

“Everyone wants to see lower taxes and the prime minister understands that,” said a Sunak ally. “They have to start saying ‘no’ to more spending because as conservatives we have to start cutting taxes.”

In her spring declaration, the chancellor resists additional public spending — also in defence – and has instead directed departments to find £5.5bn in efficiency savings.

Sunak will also bring as much of the “good news” to the bank as possible, including better-than-expected growth and tax receipts that could land him a £25bn windfall this year with hopes he cut taxes later can.

Bar chart of cumulative improvement in central government current revenue versus Office for Fiscal Responsibility October forecast (£bn), showing higher than expected tax revenue in 2021-22

But as part of their fragile approach, Sunak has agreed with Johnson on the need for a significant support package for households facing a cost of living crisis.

In an ideal world, the chancellor would postpone big budget decisions until his autumn budget, when the situation in Ukraine may be clearer and volatility in world markets may have stabilized. But Johnson, still weakened by Partygate, wants to act now. Fuel tax cuts and possible changes to NI thresholds were discussed.

Johnson’s allies insist relations with his chancellor are now good. The two men share hope that some degree of fiscal restraint this week will make room for tax cuts closer to the next election in 2024.

Professor Jonathan Portes of King’s College London predicted that Sunak could practice “austerity through stealth” while fixing public spending plans in cash Higher inflation helped generate more tax revenue than expected.

However, a senior Tory MP predicted differences between Johnson and Sunak could resurface closer to the election, particularly if higher gas and oil prices lead to it a stagflationary shock.

“You can imagine that before the election Boris wants to offer a big tax cut that would probably not be funded and Rishi refuses,” the MP said. At this point, the MP added, Sunak’s days at the finance ministry were numbered. With the cost of living rising, Rishi Sunak faces a political balancing act

Adam Bradshaw

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