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Analysis | Sunak Wins Over the Markets. Voters Are Another Story

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Two short letters have become notorious in UK political history for their candor about dire state finances. Reginald Maudling, outgoing Tory chancellor in 1964, told his Labour successor and friend, Jim Callaghan, “Sorry old cock, to leave it in this shape.” In 2010, Liam Byrne, Labour’s Chief Secretary to the Treasury, also offered his Liberal Democrat successor, David Laws, a mock apology: “I’m afraid, there is no money.” 

Their jokes were hung around their necks by their opponents, but both had the ring of truth. The governments that followed were hemmed in by their predecessors’ profligacy. Today’s opposition Labour party should remember them as a warning. 

With the Office for Budget Responsibility predicting that living standards in the UK will fall by 7% over the next two years (the steepest decline on record), the odds indicate a Conservative election defeat in two years’ time. The Office for National Statistics estimates that pay rises are being easily outstripped by price increases and that the recession will linger for a year. Middle-income earners — many of them Tory voters — will bear the brunt of the tax rises announced in Thursday’s Autumn Statement.

Prime Minister Rishi Sunak, a former Goldman Sachs Group Inc. banker, has won the respect of the markets for his fiscal conservatism, but he is struggling with voters. He polls badly when it comes to “being in touch” and “understanding the lives of ordinary people.” Perhaps we will be seeing less of his Prada loafers and expensive office clothes. The personal is forever political. Sunak’s immense private wealth and his wife’s former non-domiciled status (which gave her an exemption from taxes on her overseas income) make tempting targets for Labour.

Sunak also lacks former Prime Minister Boris Johnson’s X-factor appeal with many former Labour voters who enjoyed his cheeking of the political class. These switchers may return to their old allegiance at the next election. The Conservative party is demoralized. Its favorite paper, The Daily Telegraph, asks what is the point of voting for the Tories if they raise taxes and duck public-sector reform. The Institute of Economic Affairs, the UK’s leading free-market think tank, accuses the government  of “managing decline.” 

If the Tories lose, then Sunak’s serious chancellor of the exchequer, Jeremy Hunt, won’t fall into the trap of writing a tongue-in-cheek handover note to his likely successor, Shadow Chancellor Rachel Reeves, a former Bank of England economist. But the unspoken message will be the same: There is no money.

Labour’s recent 20-point lead in the opinion polls has put a spring in the party’s step, although electoral victory cannot be taken for granted, given the high number of seats Labour has to win for an outright majority. If they do triumph, however, Reeves and her leader Keir Starmer will have to cope with a demoralizing Tory legacy. Hunt’s £55 billion fiscal squeeze pushes back many public spending cuts until after the expected general election in late 2024. 

A center-left party that has historically supported generous public service provision will find that the piggy bank is empty. How will Labour make a difference if it can’t fund a growth strategy? Its ambitious Green Prosperity Plan, unveiled in September, bearing a hefty £28 billion price tag, looks vulnerable under current economic conditions. Will Labour just manage decline too?

Long before any general election campaign is due, traps are being set for Labour. Hunt can challenge Reeves to accept his plans or set out how she will find the money to reverse them. As Reeves herself observed in her sharp response to Hunt in the House of Commons, “the Tories want to party like it’s 2010.” In that year, Chancellor George Osborne slashed budgets and challenged Labour to say how they would balance the books. Osborne, by no coincidence, has been invited back to Downing Street to give advice on how to snooker the opposition.

Yet the last time Labour set out an alternative budget — before the 1992 election — the party was defeated, despite weariness with 13 years of Tory rule. The Conservatives and their allies in the press warned against the opposition’s impending  “double tax whammy” and Labour had no answer.

Reeves and Starmer have taken a different path. Labour has trailed the Tories on economic competence for the last 15 years. Recent market turbulence has finally given them the lead in opinion polls, but it may only be temporary — the last Tory prime minister’s package of unfunded tax cuts led to her ejection from office.

Labour’s Tony Blair and his Shadow Chancellor Gordon Brown faced the same dilemma in the 1990s. The Tory government of the day was beset by divisions, scandals and recent economic failure. But the voters still needed convincing that their money would be safe in Labour’s hands, even as a large majority wanted to spend billions rebuilding dilapidated schools and hospitals.

Reeves has elected to imitate Blair and Brown, pledging that a Labour government will not borrow to fund day-to-day spending. She even backed a Tory cut in the basic rate of income tax before it was dropped a few weeks ago. 

But there is a big difference between Labour then and now. In 1997, Blair and Brown were bequeathed sound finances by the Tories in the midst of a long post-Cold War boom. Inflation was low and the price of manufactured goods was falling because of globalization. Today, globalization is in reverse, war is on Europe’s doorstep and rising interest rates on government debt have left a black hole in the Treasury’s accounts. The tax burden has soared to heights not seen since World War II.

We are a lot closer to the Britain of Maudling’s stuttering “stop-go” economy and Byrne’s miserable post-recession bust. A glint of hope beckons in an optimistic OBR forecast for steady growth in 2025. But Labour can’t bank on that yet. More likely, there will be “no money.” The path back to power for the opposition party will be paved by penury.

More From Bloomberg Opinion:

• The UK Budget’s Deadly Silence on Housing: Therese Raphael

• The UK Could Use a World Cup Win — for the Economy: Andrea Felsted

• The UK Already Has a Nasty Wealth Tax: Merryn Somerset Webb

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Ivens is the editor of the Times Literary Supplement. Previously, he was editor of the Sunday Times of London and its chief political commentator.

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