Lord Hannan of Kingsclere is a Conservative peer, writer and columnist. He was a Conservative MEP from 1999 to 2020, and is now President of the Institute for Free Trade.
Spare a thought for Jeremy Hunt as he hunches disconsolately over his columns of figures. No Conservative Chancellor has had an uglier job to do.
The former head boy, who bounded forward with his characteristic sense of duty, must somehow convince the Office for Budget Responsibility that Britain’s debt will be falling within five years. To do so, he needs to find £50 billion annually in tax rises or spending cuts.
When George Osborne trimmed the budget after 2010, he had 13 years of Labour profligacy to work with. Week after week, the Guardian had been heavy with advertisements for public sector non-jobs. Spending demands were met automatically – indeed, often pre-emptively.
There was, in short, plenty of fat to trim. Yet even the minor nips and tucks he proposed led to howls of protest.
Hunt, by contrast, takes over when all the easy cuts have been made. He takes over, what is more, during the worst possible confluence of circumstances. Three crises, each enough in itself to ruin a government, are simultaneously in play.
First, Quantitative Easing, introduced in 2009 as an emergency response to the financial crisis, became semi-permanent. For fourteen years, the Bank of England magicked up money to buy government bonds. Did we imagine that the debt did not eventually need to be redeemed? “I’ll have my bond,” as Shylock keeps saying.
Just as QE was scheduled to come to an end, the pandemic hit. I wrote at the time that we were in denial about the costs, and we have remained in denial ever since. You can’t pay people to stay home for the better part of two years and then carry on as if nothing had happened.
Yet broadcasters, MPs and, yes, voters as a whole remain stubbornly unwilling to acknowledge the connection between the lockdowns that they demanded and the price they are now paying.
As if these accumulated debts were not enough, the spike in energy prices is almost equivalent to another furlough. It is a measure of how passive and statist we have become that the criticism of the mini-budget should have focused on the relatively small tax cuts rather than the much larger energy subsidy. After two years of quasi-dependency, we are evidently unwilling to criticise subventions.
Which brings us back to the Chancellor’s dilemma. The political response to Kwasi Kwarteng’s statement showed that cuts are politically impossible. Most Tory MPs go along vaguely with the idea that we ought to return to somewhere closer to pre-2020 budget levels.
But as soon as you propose any specific saving – raising the retirement age, say, or selling one of our aircraft carriers – they oppose it. Not all of them oppose every cut; but enough of them oppose any specific cut. As Anthony Eden put it, “everyone is in favour of general economy and particular expenditure.”
Even the one cut that MPs might cheerfully accept, namely scrapping HS2, would save very little money over the next five years, since most of the contracts have already been signed.
That is not an argument for HS2: the post-Covid changes in our working patterns make the project even less economically justifiable. But none of that is of comfort to poor Hunt as he licks his pencil.
If spending cuts are unpopular, tax rises are destructive. They reduce our overall competitiveness, shrink the economy and so, down the line, reduce government revenue.
The only way out of a fiscal hole this deep is to go for growth. Perhaps the single most bizarre development of recent weeks is the notion that it is somehow grown-up to raise taxes going into a downturn. Putting up taxes ensures a fiscal squeeze just as the economy is contracting. No school of economics recommends it.
The worst of Hunt’s dilemma is that almost no-one will sympathise. Few acknowledge the depth of our predicament. During the lockdown, we got into the habit of being paid for nothing. A panicked Treasury signed cheques uncomplainingly. Hardly surprising, then, that nurses want an impossible 15 per cent pay increase.
Nor will the Chancellor get much traction out of the argument that things are as bad in most other developed countries and that, if they had their own versions of the OBR, the French, German and American treasuries would need to retrench now rather than later. It might be true, but no one will be disposed to believe it.
There is, in short, no way out. The Conservatives will have to make excruciatingly unpopular decisions, cutting spending and raising taxes going into a recession, and at a time when a large chunk of the electorate is convinced that austerity is a choice rather than a consequence of the lockdowns.
The Tories will be on the wrong side of every argument, offending their core supporters by raising capital gains tax, inheritance tax or corporation tax, and upsetting every small-stater who ever formed part of their electoral coalition.
At the same time, ministers will face strikes from teachers, nurses, railway workers and every other unionised workforce at a time when public opinion is almost certain to favour the strikers.
And all for what? To give an incoming Starmer administration a balanced budget? To repeat the experience of 1996, when Ken Clarke’s fiscal repair work ensured that the good times coincided with the Blair government, and so gave Labour three terms?
There is one way out – though it won’t be taken. The Tories could call an early election on the impeccable grounds that the 2019 manifestoes were written before Covid, and that no party has a mandate for the cuts now required. It could let Labour explain how it would find the money.
If, as I suspect, Sir Keir Starmer won on the back of a promise that austerity could somehow be avoided through wealth taxes and windfall taxes and other mimblewimble, then let him try and implement that policy. My guess is that Labour MPs would not allow the necessary cuts, and that there would be another election within two years.
Only then might people finally understand that the money has run out.