Sunak Wins Over the Markets. Voters Are Another Story


The two short letters have become infamous in UK political history for their candor about poor government finances. Reginald Maudling, the outgoing Tory chancellor in 1964, told his Labor successor and friend, Jim Callaghan, “Sorry, old man, for leaving it in this shape.” In 2010, Liam Byrne, Labour’s chief secretary to the Treasury, also offered his Liberal Democrat successor David Laws a bogus excuse: “I’m afraid there’s no money.”

Their jokes were hung around their necks by their opponents, but both of them had an undertone of truth. Successive governments were hampered by the extravagance of their predecessors. Today’s Labor opposition should remember them as a warning.

With the Office for Budget Responsibility forecasting UK living standards to fall by 7% over the next two years (the biggest drop on record), the outlook points to an electoral defeat for the Conservatives in two years’ time. The Office for National Statistics estimates that wage growth is easily outstripping price growth and that the recession will persist for another year. Middle earners — many of them Tory voters — will bear the brunt of the tax hike announced in Thursday’s Autumn Statement.

Prime Minister Rishi Sunak, a former Goldman Sachs Group Inc. banker, has won the market’s respect for his fiscal conservatism but is struggling with voters. He polls poorly when it comes to “being in touch” and “understanding the lives of ordinary people”. We may see less of his Prada loafers and expensive office wear. The personal is forever political. Sunak’s vast private wealth and his wife’s former non-domiciled status (which allowed her to be exempt from tax on her foreign income) make tempting targets for Labour.

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Sunak also lacks the X-factor appeal of former prime minister Boris Johnson with many ex-Labour voters who enjoyed his insults to the political class. These switchers may return to their old allegiances at the next election. The Conservative Party is demoralized. Their favorite newspaper, The Daily Telegraph, wonders what’s the point of voting Tory if they raise taxes and avoid public sector reform. The Institute of Economic Affairs, Britain’s leading free-market think tank, accused the government of “managing the downturn”.

If the Tories lose, then Sunak’s serious Chancellor of the Exchequer, Jeremy Hunt, will not fall into the trap of writing a cheeky handover message to his likely successor, shadow chancellor Rachel Reeves, a former Bank of England economist. But the unspoken message will be the same: No money.

Labour’s recent 20-point lead in the polls has put a spring in the party’s step, although an election victory cannot be taken for granted given the large number of seats Labor needs to win for an outright majority. However, if they triumph, Reeves and her leader Keir Starmer will have to deal with a demoralizing Tory legacy. Hunt’s £55 billion fiscal squeeze is delaying many public spending cuts until an expected general election in late 2024.

A centre-left party that has historically supported the generous provision of public services will find its coffers empty. How will Labor make a difference if they can’t fund the growth strategy? His ambitious Green Prosperity Plan, unveiled in September, which carries a hefty £28bn price tag, looks vulnerable in the current economic conditions. Will Labor just manage the decline too?

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Long before the general election campaign comes around, traps are being laid for Labour. Hunt can challenge Reeves to accept his plans or determine how to find the money to undo them. As Reeves herself noted in her scathing response to Hunt in the House of Commons, “the Tories want to party like it’s 2010.” That year, Chancellor George Osborne cut budgets and challenged Labor to say how it would balance the books. Osborne, not coincidentally, was invited back to Downing Street to give advice on how to snooker opponents.

Yet the last time Labor tabled an alternative budget – before the 1992 election – the party was defeated, despite the fatigue of 13 years of Tory rule. The Conservatives and their allies in the press warned against the coming “double tax punch” from the opposition, and Labor had no response.

Reeves and Starmer took a different route. Labor has trailed the Tories in terms of economic competence for the past 15 years. Recent market turbulence has finally given them a lead in the polls, but it may only be temporary – the Tory prime minister’s latest package of unfunded tax cuts saw her ousted from office.

Labour’s Tony Blair and his shadow chancellor Gordon Brown faced the same dilemma in the 1990s. The Tory government at the time was beset by divisions, scandals and recent economic failure. But voters still needed to be reassured that their money would be safe in Labour’s hands, even though the vast majority wanted to spend billions rebuilding dilapidated schools and hospitals.

Reeves decided to imitate Blair and Brown, promising that the Labor government would not borrow to finance everyday spending. She even backed the Tory cut to the basic rate of income tax before it was scrapped a few weeks ago.

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But there is a big difference between Labor back then and now. In 1997, the Tories bequeathed Blair and Brown sound finances in the midst of a long post-Cold War boom. Inflation was low and the prices of industrial goods were falling due to globalization. Today, globalization is in the opposite direction, war is on Europe’s doorstep, and rising interest rates on national debt have left a black hole in the accounts of the Ministry of Finance. The tax burden has soared to heights not seen since World War II.

We are much closer to the Britain of Maudling’s stalled stop-and-go economy and Byrne’s miserable post-recession ruin. There is a glimmer of hope in the OBR’s optimistic forecast for steady growth in 2025. But Labor can’t count on it just yet. It is more likely that “there will be no money”. The road back to power for the opposition party will be paved with penury.

More from Bloomberg Opinion:

• The deadly silence of the UK housing budget: Therese Raphael

• Great Britain could use a World Cup win — for the economy: Andrea Felsted

• The UK already has a nasty wealth tax: Merryn Somerset Webb

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

Martin Ivens is the editor of the Times Literary Supplement. He was previously the editor of the London Sunday Times and its chief political commentator.

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