Why Rishi Sunak quit

Why Rishi Sunak quit

9 July 2022

9:00 AM

9 July 2022

9:00 AM

On Tuesday, the last cabinet meeting with Sajid Javid as health secretary and Rishi Sunak as chancellor passed without any hint that either was about to resign. The ministers did not co-ordinate their resignations, but they had both been tipped over the edge by growing evidence that No. 10 had misled MPs by declaring Boris Johnson had no prior knowledge of Chris Pincher’s behaviour. Sunak had also grown tired of the Prime Minister’s economic ‘cake-ism’ – the fantasy of wanting both high spending and low taxes. The contradictions had become untenable.

In that cabinet meeting, Johnson offered more cake. He was his usual ebullient self, promising a morale-raising speech to move on from recent woes. It was Michael Gove who confronted him. Now is the time for candour, he said, not misleading boosterism. Tackling inflation would be very painful so there’s no sense in pretending otherwise. And didn’t part of the problem rest around the cabinet table? ‘Fiscal Nimbyism,’ he called it. Ministers claim to love low taxes, but when spending cuts are suggested to make a low-tax economy possible, they all say: not in my department.

In Sunak’s resignation letter, in which he noted his ‘fundamentally different’ economic approach to the Prime Minister, he made it clear that he agrees with Gove. ‘Our people know that if something is too good to be true,’ he wrote, ‘then it’s not true.’ The highest spending in decades has been coupled with the highest tax burden in living memory. Sunak could no longer pretend otherwise. Can Nadhim Zahawi?

The first test for the new Chancellor – a self-made millionaire and a future leadership hopeful – is whether he can stomach the joint economic speech that Johnson had tried to plan with Sunak over the summer. The prospect of this speech is said to have contributed to Sunak’s decision to resign: he did not want to deliver feelgood remarks without substance behind them.

In the hours before Zahawi’s appointment, the Prime Minister boasted to Tory MPs that losing Sunak would make tax cuts ‘a bit easier to deliver’. No. 10 will put pressure on the new Chancellor to make this happen, while also sticking to Johnson’s big spending promises. It’s difficult to see how this position will be possible when every 1p cut from income tax costs the government £5 billion.

Zahawi used his first interview as Chancellor to suggest that he could scrap Sunak’s plan to raise corporation tax from 19 per cent to 25 per cent next year. Yet despite his hints at tax cuts, not much is known about his economic view. As a backbencher he joined the Free Enterprise Group – a caucus of free-market MPs – but has been fairly quiet since. Those close to him say he is attracted to the idea – popular among supporters of Liz Truss – that the government’s Covid debt should be treated like war debt, a one-off paid back over decades, which might extend the government’s fiscal headroom to allow more borrowing for spending boosts and tax cuts.

Sunak believed this approach was hugely dangerous. To borrow out of an inflation crisis, at a time when interest rates are soaring, risks deteriorating the public finances further and, in the worst-case scenario, triggering a debt crisis.

Just as Sunak warned well over a year ago, inflation and higher borrowing costs have dramatically hiked the government’s debt servicing bill. The UK is more exposed than other major countries because roughly a quarter of the national debt is linked to inflation. Interest on the national debt was £7.6 billion for the month of May – almost twice what it was last year and the fourth highest monthly amount on record.

And what happens when the gap between spending promises and tax promises becomes so large that borrowing will not be able to cover it? This isn’t just a Covid problem, though the pandemic exacerbated the strain on public finances. Healthcare and pension costs were forecast to become unsustainable long before lockdowns. Spending on the NHS alone is predicted to reach 44 per cent of the government’s day-to-day outgoings in the next three years. Extra debt might stretch over the gap between what’s promised and deliverable for a while, but it can’t last.

Tax cuts would help to ease the pain felt by the cost-of-living crisis, and possibly boost morale (at least temporarily) among the Tory grassroots. But they would not address the fundamental economic problem of growth, which is predicted to be the lowest in the G20 next year apart from Russia.

The government’s decision not to pursue substantial supply-side reform will be the biggest limit on what Zahawi can achieve. The new Chancellor can have big ambitions for boosting economic growth and adding to the Treasury’s coffers by creating more – rather than more heavily burdened – taxpayers. But tax cuts will only get results if they are supported with a well-crafted system of reform, designed to liberalise the most bogged-down sectors (mainly housing and healthcare). Tory backbenchers have suggested they will not tolerate such reforms and so the PM, now at the mercy of his parliamentary party, also refuses to budge.

In the end, Sunak’s Thatcherite tendencies – to look after the deficit – clashed too much with Johnson’s Reaganite feeling that the deficit is big enough to look after itself. Sunak wanted to fund tax cuts with spending cuts. Johnson rejected this trade-off. Now that the Prime Minister is on to his third chancellor in less than three years, it’s clear he won’t be switching policies, only personnel. For as long as Johnson stays in No. 10, he will want to have his cake and eat it. And it will be Zahawi’s job to serve it up.<//>

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