Rishi Sunak is set to be our new Prime Minister and Tory dreams and fantasies may finally be coming to an end. For political parties, such bubble-bursting can be painful. Nigel Lawson’s boom in the late Eighties was followed by a prolonged bust. The “no more boom and bust” promises of Gordon Brown led to, funnily enough, both boom and bust. And, much more recently, the Liz Truss “deliver, deliver, deliver” mantra led to a financial upheaval and her own resignation.
After new Chancellor Jeremy Hunt decided to rip up almost every aspect of Kwasi Kwarteng’s mini-Budget, “sound money” looked like it was emerging victorious after a brief dalliance with “let’s borrow large amounts of additional money, pretend that growth is going to be a lot stronger than it has been in many a year and thus magically transform the economy and the nation’s finances”. Sunak’s success may merely rubber-stamp what Hunt was in the process of delivering.
During his failed summer leadership campaign, Sunak positioned himself as the fiscal Conservative: no major tax cuts until inflation was brought under control, an ultimate ambition to lower the basic rate of income tax — but only later in the next Parliament — near-term increases in national insurance and corporation tax to prove his fiscal credentials to the financial markets, and a tough stance on public-sector pay. His message was very much the opposite of Truss’s “cut taxes today, pay back tomorrow”.
Sunak’s desire for sound money reflects two factors familiar to any former Chancellor: first, the financial markets can be remarkably unforgiving; and, second, voters know that anything other than sound money can trigger chaos in their personal lives.
Yet if sound money is imposed in response to failed dreams, the damage to the ruling political party can be significant. Denis Healey’s decision to call in the IMF in 1976 may have helped impose fiscal discipline on a rabble of a cabinet but the national humiliation didn’t help Labour’s case in the general election in May 1979. The adoption of inflation targeting in 1992 following sterling’s ignominious exist from Europe’s Exchange Rate Mechanism may have been a defining moment in the UK’s monetary arrangements — the inflation targeting regime is still there 20 years later — but it was sterling’s devaluation which destroyed the Tories’ reputation for economic and financial probity and led to their defeat in 1997.
The next general election must be held by January 2025 at the very latest. If, as opinion polls currently suggest, the damage done to the Tories’ economic and financial reputation is off-the-charts catastrophic, history suggests there’s little chance of Sunak enjoying a recovery big enough to allow the Tories to return to power.
He will need to cope with a world in which growth has been too low (both in the UK and elsewhere), inflation too high, promises too big, and “cakeism” too widespread. It means he can no longer deal with every economic setback via a fiscal handout: he no longer has the fiscal space he enjoyed as Chancellor when responding to Covid.
Sunak is constrained by a tricky economic reality. There can be no “build back better” while there is too much inflation. There can be no tax cuts if the resulting increase in borrowing leads to a “creditors’ strike”. There can be no generous increase in public spending if the economy is simply unable to grow as quickly as it once did.
At this point, however, the political calculus becomes painful. Even if Sunak embraces “sound money” reality, the current Tory intake will forever be associated with broken dreams. As such, the belated adoption of sound money creates two problems. First, its painful initial side effects — austerity, recession — will limit any recovery in the opinion polls. Second, by constructing solid foundations for the next economic recovery, the chances are that a future incoming government will rule for a long time. Margaret Thatcher benefited in the Eighties after Labour tried to put the nation’s financial house in order.
Tony Blair benefited in the late Nineties and early Noughties after Ken Clarke sorted out a mess of the Tories’ own making after the ERM crisis. Perhaps Sir Keir Starmer will be the main beneficiary of Sunak’s return to sound money, itself a consequence of Truss’s failed dalliance with dreams.
