Chancellor Wonga: Why Rishi Sunak prefers a quick fix
Inflation (as measured by the consumer price index) has reached 6.2% over the past 12 months and is expected to average 7.4% this year. According to a recent study by Royal London, one in 20 people in the UK think they may have to ‘go their own way’ with payday loans – which are, to quote MoneySavingExpert, ‘a financial nightmare’ to be ‘avoided entirely’. There is one person in the UK, however, for whom short-term financial solutions make sense: the Chancellor, Rishi Sunak.
In his spring statement today, Sunak announced just £500million in new spending to tackle the biggest hit to the cost of living in at least 30 years; everything else was a tax cut, a loan or a loan-like measure. The biggest announcements from the spring statement – a £3,000 rise in the National Insurance contribution threshold and a 1% reduction in the basic rate of income tax – are ‘fictitious spending’: quick, short-term measures that are easily undone.
Throughout the pandemic and subsequent cost-of-living crisis, Sunak’s policies have followed payday loan economics rather than the long-term plan. Like every other country, the UK has had to spend heavily to keep its economy afloat, but unlike other countries, the UK has favored retractable aid – quick loans and tax adjustments, rather than benefits and subsidies. The £200 energy rebate is effectively a loan (which households will have to repay whether they benefit from it or not) and the urgent need to insulate and sustainably heat homes across the UK is addressed with new loans; the response to the housing affordability crisis has been to facilitate borrow more money; housing tax, corporation tax and fuel tax have been temporarily adjusted.
Such measures are useful “when the person or business you want to help is going through a period of low income or low cash flow,” says Tom Waters, senior research economist at the Institute for Fiscal Studies. The Energy Bill Rebate, a £200 rebate that households will repay on their bills over the next five years, says “costs are going to be very high this year, so it’s a tough time for households But the fact that households, especially middle- and slightly upper-income households, can benefit from the program does not mean that they are indefinitely poorer,” says West.
Most economists, however — including the Chairman of the US Federal Reserve — agree that this period of inflation can no longer be described as transitory. Analyst Cornwall Insight predicts that energy price volatility will continue into the 2030s. The UK, however, continues to tax and spend like it’s enough to tinker quickly.
“Loans and tax cuts are the lever of choice when you react to events, rather than trying to get ahead of them,” observes Alfie Stirling, chief economist at the New Economics Foundation. “If you were trying to beat the current price increase, you would have spent two years massively renovating your home to prove everyone’s energy efficiency and lower everyone’s bills in the long run – but that’s not something you you can activate overnight.”
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However, successive chancellors have aimed to keep spending “off the book” – a loan or temporary tax cut can be kept off capital spending reported by the Office for Budget Responsibility, giving the impression that the government is managing the economy better. New Labour’s enthusiasm for the PFI was driven by such incentives.
Stirling adds that for Sunak, such measures are also more disposable: “If you create something entirely new, which then has an expiry date, it’s much easier to throw away than to reverse an increase in spending on an existing program. I think the £20 increase in Universal Credit demonstrated that – it was actually harder to get rid of than the whole furlough scheme, in terms of the political opposition it received.
The problem for the “hard-working families” that Sunak claims today’s measures are designed to protect, especially those on low incomes, is that “targeted subsidies like allowances are by far the most effective thing to do,” says Tom West.
The wider economy will also pay for short-term thinking, as it has for the UK’s tight response to the pandemic. In March 2020, Sunak’s initial plan – as other countries guaranteed mortgages, laid off workers and handed out helicopter money – was to to deploy themselves eligibility for sickness benefit. This plan had to be torn up almost immediately when it became apparent that it was not going to cover the necessary response. According to Tom West, some of the current policies could work in the same direction: if energy prices remain high, “it wouldn’t be the most surprising thing in the world if the [energy rebate] reimbursement was delayed for a year, or if it was canceled, and it turned out to be a grant”.
However, the UK’s response to the pandemic has remained weak compared to that of other countries. The US spent £100bn more per year on fiscal stimulus than the UK after taking into account the different sizes of the two economies, and therefore recovered much faster; as a result, the UK faces the the deepest economic scars of any G7 economyaccording to the OECD.
Stirling points out that the same can happen in the UK’s response to global inflation. “A lot of other countries go much further,” he says. Sunak, however, is “caught between the need to respond to the crisis as reality plays out, which requires more spending in some way, and the long-term will – let it come from his back MPs -ban or of one’s own ideological disposition – to have a small state.
Politically, this is why the Treasury continues to act as if payday is approaching and a quick fix will do: Those to the right of the Conservative Party are already concerned about the high-tax economy. and high expense into which they were forced by events. A Conservative MP called Sunak, a former hedge fund manager and avowed Thatcherite, a “socialist” in the Commons. If the UK’s response to the cost of living crisis is as inadequate as its response to Covid, it is this policy stance that ‘hard working families’ will pay for.