Voices: Treasury orthodoxy has triumphed over Trussonomics

The “Treasury orthodoxy” attacked by Liz Truss has triumphed over Trussonomics. As it dances on the grave of this damaging experiment, the Treasury talks up tax rises and spending cuts to fill a £50bn black hole in the autumn statement on 17 November.

Jeremy Hunt, the chancellor of the Exchequer, told business people last night that there was “no way of sugar-coating” the fact that personal and business taxes would increase and public spending would be cut. “It’s going to be a difficult pill for everyone to swallow,” he said.

There’s speculation at Westminster about a rise in the 20p basic rate of income tax, and that Rishi Sunak could even bring back his increase in national insurance contributions, reversed by Truss. However, there are good reasons why these nuclear options are likely to be ruled out.

Sunak says he wants to return to the Tories’ 2019 election manifesto, knowing his rebellious MPs will find it harder to attack parts of the platform on which they were elected. The manifesto promised that there would be no increase in the rate of income tax, national insurance or VAT. True, Sunak broke that promise when as chancellor he increased national insurance in April to raise money for health and social care. But the temptation to revive the increase in order to raise £15bn must be tempting.

This “pill” might be less bitter if people thought the money was earmarked for health and care. But there’s a problem: Hunt intends to delay for at least a year the proposed £86,000 limit on an individual’s lifetime care bills. The government would struggle to sell a health and care levy that was not accompanied by long-overdue care reforms.

So I suspect Hunt will rely heavily on less-visible stealth taxes, such as extending the freeze in tax allowances – due to end in 2026 – until 2028, so more people are dragged into higher tax bands. This raises big money. It might even allow the Tories to promise to cut the highly visible 20p basic rate in their 2024 election manifesto in the hope of putting Labour on the spot.

As polling guru John Curtice told Westminster journalists today, Sunak has revived Tory ratings on the economy and on having the best prime minister. But Labour remains well ahead in the two-party race, and Curtice said it would be “extremely difficult” for the Tories to win the next election. He pointed out that “previous governments that have presided over a fiscal/financial crisis have not prevailed at the next election, but this is the first time a new leader has been installed in the wake of such a crisis”. The professor of politics at Strathclyde University said a key test now is whether Sunak’s personal popularity can be transferred to his party.

Some previously gloomy Tory MPs suddenly think Sunak has a fighting chance of denying Labour an overall majority next time. But I think the current hiatus is the calm before the storm: Sunak’s brief honeymoon will surely come to a halt with Hunt’s statement. It seems he is going to upset everyone. Tory MPs in the party’s blue wall in the South fear that tax rises would alienate their natural supporters, while those representing the red wall in the North and Midlands rightly fear the impact of spending cuts.

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Rachel Wolf, co-author of the Tories’ 2019 manifesto, told a Resolution Foundation event that higher public spending and a new immigration settlement were “by far the most important promises in the manifesto” after Brexit. “Better public services” were at its core, she said. Worryingly for Sunak, Wolf warned it would be “almost impossible” in the current economic climate to go back to the manifesto’s central promises. Red wall voters, struggling in the cost of living crisis, feel that the basic public services on which they rely are already “failing”, she said.

It is also dawning on Tory MPs that tax rises and spending cuts could hinder growth. “There is now a risk that we go from one extreme to another, and overshoot to please the markets,” one said. However, Hunt will probably reject their pleas to delay his tax hikes and spending cuts until after a 2024 election, because the financial markets want to see a down payment on reducing government debt now.

The danger is that Treasury orthodoxy overcompensates in correcting Truss’s mistakes and takes the country too far in the opposite direction. It could be trapped in a vicious cycle of low growth, more cuts and more tax rises. If that sounds eerily familiar, it is: it was the fair point Truss made when she launched her “go for growth” crusade. Right diagnosis, but wrong cure in her reckless unfunded tax cuts.

Sunak and Hunt should pause and reflect. The Tories’ tentative hopes of a fightback could be wrecked by going too far in an autumn statement that will define the terms of political trade between now and the election.