Jeremy Hunt has set a course for the Conservatives that will surely send the party to defeat at the nextelection. The chancellor, emulating two of his predecessors, can do little and achieve even less over the next 18 months other than his twin objectives – to oversee a fall in inflation and restore trust in the UK’s public finances.
The sense of “declinism” that he said on Friday was undermining Britain’s recovery will become more prevalent, not less, under his stewardship, playing into Labour’s hands. Words rather than action will be the order of the day for him, because bringing down the annual budget deficit will deny him the funds needed to boost public spending. The right wing of his party will also prevent him from intervening to solve problems that should, in their view, be left to the market.
If Hunt wants to know how this might play out, he would do well to study the experiences of two of his predecessors in No 11 who found themselves in a similar bind – Roy Jenkins and Ken Clarke.
Jenkins, who went on to found the SDP and become Britain’s chief Eurocrat, was handed a poisoned chalice when he took over as Labour’s chancellor towards the end of 1967. He inherited an economy in shock after a balance of payments crisis and a major currency devaluation.
The previous Conservative administration of Alec Douglas-Home had embarked on a tax-cutting spree that had sent inflation rocketing. His chancellor, Reginald Maudling, had promised “expansion without inflation” in his 1963 budget, but the extra cash was used by businesses and households to buy imported goods, sending the trade balance into deficit. Inflation jumped from 0.8% in July 1963 to 5.6% in April 1965.
Jenkins set about balancing the books, persuading his prime minister, Harold Wilson, that Labour had no choice if it was to regain the respect of international investors and get the economy moving. To Wilson’s cost, a period of austerity through pay restraint and limits on government spending came to dominate public debate, pushing large parts of the voting public into the arms of Ted Heath’s Conservatives in 1970.
The history books show that Heath wrecked the sound financial situation left to him by Jenkins when he embarked on another tax-cutting spree. It ended in disaster just a couple of years later – a situation that Labour was left trying to unpick once it took power again in 1974.
Gordon Brown, it must be said, sought to avoid this historical precedent when he inherited the much-improved public finances left to him by Clarke, a Conservative former home secretary who had burnished his reputation for toughness by playing a major role in Margaret Thatcher’s downfall.
Clarke became chancellor in 1993 in the wake of Britain’s humiliating exit from the Exchange Rate Mechanism the previous year. That episode, much like the 1967 devaluation, destroyed the government’s reputation for sound economic management. But, like Jenkins, Clarke made a stab at recovering lost ground through tax rises and spending cuts to balance the books.
He might have succeeded in securing the Tories victoryhad the party not been mired in allegations of sleaze and horribly split over Britain’s membership of the EU. Clarke had the luxury of four years to turn the situation around and by 1996 unemployment was falling, wages were rising and the property market, which had crashed in 1989, was beginning to show signs of life.
From the vantage point of an incoming chancellor, Jenkins and Clarke did the right thing. They may have cut public investment and in so doing undermined the economy’s potential for growth. Yet they were meticulous in how they went about stabilising the public finances after economic calamities, in both cases engineered by the previous Tory administrations.
Hunt finds himself in a similar position to Clarke, but limited to the two years that guillotined Jenkins’s time in No 11.
Again it has been a reckless Tory administration that has forced the chancellor into a corner. The speeches made by Liz Truss’s chancellor, Kwasi Kwarteng, appeared almost to have been cut and pasted from Maudling’s.
Kwarteng said a dash for growth using tax cuts would have no implications for inflation or the UK’s reputation as a safe haven for foreign cash. It did, for both, and in a way that was even more ruinous for a cohort of potential Tory voters – first-time buyers. Part of the inflationary spiral they now face in terms of higher home loan costs is not picked up in the official consumer prices index (CPI) – currently showing annual inflation at 10.5% – which excludes housing costs.
The extra increases in interest rates over the past year, which are forecast to continue this week when the Bank of England meets on Thursday, are largely due to the Truss-Kwarteng debacle, and will add about £3,000 to the annual payments of the average homeowner who needs to refinance their mortgage.
As Hunt is also being forced by his party to play hardball with nurses and teachers over pay, limit spending on everything from prisons to social care, deflect questions about the party chairman’s tax penalty and deflect constant criticism from disaffected supporters of Boris Johnson, surely his goose is already cooked. Like Clarke and Jenkins, he cannot help his party avoid defeat.
