Chancellor Jeremy Hunt on Wednesday vowed to squeeze “every last drop of high inflation out of the economy”, but this arduous task now poses a serious threat to Tory prospects in an expected 2024 general election.
Hunt and Rishi Sunak had hoped the economy would be turning a corner in early 2024, with inflation under control, confidence returning and — crucially — taxes falling.
But Wednesday’s official economic data hit those hopes hard. Core inflation is rising, the headline rate of price growth was static at 8.7 per cent for May, net government debt exceeded 100 per cent of gross domestic product, meaning the case for responsible tax cuts is becoming harder to make.
The grinding misery for voters of rising prices and higher mortgage rates looks likely to continue into election year, with the possibility the Bank of England will push the economy into recession to curb high inflation.
“Politically it’s grim,” said David Gauke, former Tory Treasury minister. “From the Conservative point of view, the economic and political cycles are misaligned.”
The dark outlook was summed up by Karen Ward, chief market strategist at JPMorgan Asset Management and an economic adviser to Hunt, who told the BBC: “The economy is running too hot and it has to slow.”
She added: “The Bank of England has to create a recession, create uncertainty and frailty.” Even if Hunt agreed with his adviser’s economic analysis, he would not welcome the political consequences.
Hunt and Sunak have agreed that for all the political criticism they will incur in the short term, the only viable plan is to help the BoE bear down on inflation and to keep spending under control.
“Today’s figures strengthen the case for the government to stick to its guns no matter what the pressure from left, right or centre,” said Hunt, in a message to MPs from all parties demanding a mortgage bailout package for households.
“We aren’t in a pandemic now,” said one senior Tory, adding it would be “madness” for the government to be pumping money into the economy even as the BoE tried to drain it away through higher interest rates.
Hunt wants banks to “live up to their responsibilities” and to help households in distress. He discussed options on Wednesday with Martin Lewis, the consumer champion and founder of Moneysavingexpert.com, and meets mortgage lenders on Friday.
Asked about tax cuts, Hunt said: “The way to grow the economy, the way to give ourselves more headroom, to spend more on public services like the NHS, to bring down the tax burden, is to tackle inflation.
“Inflation is the biggest, the most invidious tax rise the British people are facing right at the moment because it’s eroding the value of their weekly, monthly salaries. So that is our primary priority.”
Sunak pledged in January to halve inflation to 5.5 per cent by the end of the year, and that will now be tough. His spokesman said the target was more “ambitious” than people thought at the time it was announced.
And while tax-cutting at a time of high inflation might be considered economically reckless, the high level of public borrowing — with the UK debt-to-GDP ratio exceeding 100 per cent for the first time since 1961 — is another constraining factor.
Analysts said the worse than expected state of the public finances, with higher interest rates pushing up debt servicing costs, cast doubt on Hunt’s ability to make big pre-election tax cuts while adhering to his fiscal rules.
However senior Tories insist such tax cuts remain “priorities” for Hunt and Sunak and they hope to start that process either in the chancellor’s Autumn Statement or in next spring’s Budget.
Labour leader Sir Keir Starmer honed two main lines of attack on Sunak at prime minister’s question time in the House of Commons on Wednesday, as he sought to capitalise on the cost of living crisis.
The first is that the Conservatives have imposed a “Tory mortgage penalty” on households through their economic mismanagement, including Liz Truss’s “kamikaze” mini-Budget in September last year.
The second is that Sunak is oblivious to the distress this is causing because he lives in a bubble of wealth, viewing economic problems on the ground from “the vantage point of a helicopter”.
Starmer claimed Sunak was more concerned about the mortgage market in California: the prime minister has a home in Santa Monica.
Given the BoE has admitted mistakes in its inflation forecasting and the political consequences of that for the Conservatives, it is perhaps surprising there has not been more political criticism of the central bank.
The BoE Monetary Policy Committee is expected to raise interest rates again on Thursday, a move which will increase the pain for the homeowners who make up the bedrock of Tory support.
Former Conservative minister Sir Jacob Rees-Mogg said BoE governor Andrew Bailey should take “primary responsibility for the bank’s failure on inflation”, adding the MPC took its lead from him.
“When Andy Haldane warned, as the bank’s chief economist, that inflation was not a blip, the governor ignored him and now interest rates are going up more than would have been necessary,” added Rees-Mogg.
