How will Sunak right Britain’s fiscal ship? His past holds clues

Rishi Sunak leaves his office in Westminster on Sunday. Picture: Hollie Adams/Getty Images

On a day that a sobering federal budget is delivered with a downgraded growth forecast, spare a thought for the new British prime minister – now almost certain to be Rishi Sunak after Boris Johnson bailed out of the race.

Britons face both spending cuts and tax rises as Sunak moves to steer the country through the “toughest of times”, as he telegraphed on Sunday. Inflation is now 10.1 per cent and the Bank of England expects a peak this month at 11 per cent. An energy crisis in the UK has forced the government to spend billions of pounds to cap home energy bills.

On Friday public sector borrowing surged to £20bn ($35.9bn) for September, £3bn more than expected thanks largely to rising interest on debt repayments.

After the notorious September mini budget owned by outgoing Prime Minister Liz Truss, Sunak must restore confidence in Britain’s economic management. If he cannot, this high office will be a poisoned chalice.

Two clues give a sense of the direction he will take. First is the fiscally conservative policy he took to the people in the leadership race against Truss after he resigned as chancellor. He warned that Truss’ growth at all cost strategy was unfunded. He argued that tax cuts should only be made once inflation was under control.

Secondly, Sunak will almost certainly keep Jeremy Hunt in as chancellor. Hunt backed Sunak this week, rather pointedly using Johnson’s hero Winston Churchill. “He told the truth, the country listened, believed him and followed him. We have a leader who can do just that in Rishi Sunak,” he wrote in a post on Twitter.

Hunt has his sleeves rolled up on the Halloween Statement. He has already flagged that some eye-watering difficult decisions need to be made. Hunt’s swift action to reverse almost all the £45bn in Truss tax cuts calmed markets and pushed the pound back from $US1.01 to $US1.13.

Jeremy Hunt is almost certain to be retained as chancellor should Rishi Sunak become Britain’s next Prime Minister. Picture: AFP/Jessica Taylor /UK Parliament

But bond yields are again showing signs of nervousness, particularly around the size of the energy package. Early reports had the cost running to £90bn, but the energy cap will now only last until April and not the two years of the mini budget. It is possible that the final cost, driven by wholesale gas prices, will be lower than expected. Gas futures pricing has dropped since peaking in August. Much depends on Ukraine.

So high are the political stakes that Sunak and Hunt are now guided by the Office of Budget Responsibility, which the government established to give an independent view of public finances.

Truss and Kwarteng simply ignored the OBR altogether but this is no longer tenable.

Hunt has been told by the OBR that there is still a £40bn hole in the budget. He is considering £20bn in higher taxes.

Company taxes which Truss pledged to keep at a low of 19 per cent are returning to 25 per cent. And big gas and banking may be in the crosshairs. In May, Sunak – as chancellor – introduced a windfall profits tax on the oil and gas sector. Truss ruled that out going forward, but it is Labour policy.

A year ago, Sunak cut the bank surcharge, introduced during the financial crisis from 8 to 3 per cent. As chancellor, Kwasi Kwarteng planned to keep company tax at 19 per cent decided not cut the bank levy. It will be interesting to see what the Sunak/Hunt camp choose to do here.

The October statement will also target spending cuts in government departments, potentially by as much as 15 per cent. The truss commitment to increase defence spending to 3 per cent of GDP could also be dropped.

The British press is wired with ideas of cuts to programs from HS2, the giant infrastructure project where the budget has blown out to £98bn, to flagship research and development funding.

Assuming he remains chancellor, Hunt will be pushing to keep the release of the fiscal statement at October 31. But this gives precious little time for a new prime minister to help reshape the policy and the narrative for markets.

Politically, the silvertail Sunak should not expect an easy ride.

He and wife Akshata Murty are among the richest people in Britain. The daughter of the Infosys billionaire, Murty was outed for using her non-domiciled status to avoid a potential $20m in taxes. She has since agreed to pay tax as a resident.

Sunak enters Number 10 as leader of a party trailing Labour badly in the opinion polls.

And there is a constant threat of Johnson whose supporters believe is the only person who can lead the Tories to victory against Labour come 2024.