(Bloomberg) — Rishi Sunak can do self-restraint. After an addiction to drinking full-strength Coca-Cola resulted in seven fillings to his teeth, he rationed himself to a single Coke a week.
When he comes to deliver his budget on Wednesday, the chancellor of the exchequer faces a battle to persuade his colleagues of the need to turn down the flow of government spending, and to address the painful hole in the public finances, approaching 400 billion pounds ($558 billion).
The question he’s still grappling with is how to pay the bill. Will he raise taxes, hitting the wealthy and clawing back profits from the few businesses that made them, as some suggest? Or will he prepare the ground for cuts to public spending? Or will he instead signal that the pain of cuts and taxes will have to come, but just not yet?
Sunak’s answers will shape his own fortunes, the Conservative government’s political identity, and the U.K. economy’s chances of making a full recovery from its deepest recession for 300 years.
“We went big, we went early, but there is more to come and there will be more to come in the budget. But there is a challenge,” with public finances and “I want to level with people about the challenge,” Sunak told the Financial Times in an interview Friday.
In common with finance ministers around the world, Sunak poured out vast sums of taxpayers’ cash to save jobs and businesses when coronavirus forced the government to shut shops and restaurants and confine people to their homes.
Now that Prime Minister Boris Johnson has laid out his “road map” for a cautious four-month lifting of the lockdown, Sunak is reconciled to keeping that flow of support going for as long as the restrictions are in place.
That will mean extending the 54 billion-pound furlough wage support program, along with cuts to business rates and sales tax at least until the end of June. This won’t be a surprise to Sunak’s colleagues and will please many, but not all, Conservative members of Parliament on Wednesday.
But it runs against the grain of his instincts as a small-state Conservative, and many of his colleagues are also deeply uneasy about the economic policy their Tory government finds itself pursuing. The prospect of hiking taxes – including potentially a sharp rise in business levies – to pay the bill is particularly hard for most Tories to swallow.
In recent weeks, the chancellor has been working assiduously to canvass his colleagues’ views in an effort to understand what he’s up against and tailor his messages to match. Some MPs report being invited to four or five Zoom calls with Sunak in the run-up to his budget.
“Rishi was very open, very listening, really cared about what we were saying,” said Alexander Stafford, one of the new Tory MPs elected in December 2019. “We all know there are going to be cuts or tax rises. My hope is none of that falls too hard at the moment. We’re not out of the woods yet.”
Others put it more bluntly. “If he were to raise taxes, it would undermine everything we’ve done to get businesses to this stage,” said Andrew Bridgen. “No society can ever tax its way to prosperity.”
Among the details emerging on the plan, Sunak will pledge 22 billion pounds for a previously proposed infrastructure bank to boost the country’s green economy, the Treasury said in a statement on Saturday. The bank will offer a range of products, including equity, loans and guarantees, to support projects in sectors such as renewable energy, carbon capture and storage and transportation. He’s also expected to announce the launch of a fund that would channel up to 375 million pounds into fast-growing tech start-ups.
Steve Baker, a Tory who sits on the Treasury committee and will interrogate Sunak on his choices, said the government’s priority must be to create better-paid jobs for people in the months ahead. “I just don’t see how raising taxes promotes more, better, higher paying jobs for the public,” he said.
The pandemic has fundamentally challenged the Tory party’s sense of what it stands for. In the past, Conservatives have flirted with privatizing state healthcare, cut welfare payments, and slashed taxes for high earners.
Yet Johnson’s team now paints itself as the champions of the National Health Service while pumping up social security and weighing options to raise levies on capital gains.
The influx of more than 100 new Conservative Members of Parliament in 2019, many of them representing northern seats prised from the left-wing Labour Party for the first time in decades, has changed the makeup of the party in Westminster.
There’s less clamor for fiscal prudence than in years gone by, and there’s certainly no appetite for the return of the austerity policies pursued over much of the last decade by Tory-led administrations.
Historically low interest rates mean there also isn’t pressure from the bond markets on the chancellor to rein in his spending immediately. While the country’s debt has ballooned during the crisis, the cost of servicing it has actually fallen.
Yet Sunak sees big risks in doing nothing to address the U.K.’s pandemic-ravaged public finances. Even if he delays most of the difficult decisions until the next budget in the fall, or even next year, many of his colleagues expect he won’t be able to put off the pain any further.
Bond markets are signaling that Sunak’s borrowing costs may only get higher. Interest rates on gilts in financial markets have risen a half percentage point in the past month for securities maturing in six years and beyond. The yield on the Treasury’s benchmark 10-year gilt reached 0.836% on Friday, the highest since March 2020 when the pandemic began spreading widely in Europe. Every 1 percentage-point increase in interest rates adds 25 billion pounds to the U.K.’s cost of servicing its debt, Sunak told the FT.
“We all know that the markets can turn very, very quickly,” Harriet Baldwin, a Conservative who traded bonds during a market rout in 1994. “Although the situation is very favorable at the moment, it’s not necessarily always going to be the case. He’s got a tricky tightrope to walk.”
Observers praise Sunak for his work ethic and attention to detail, and the chancellor himself has said he likes to start his day with a workout, either on a treadmill, in the gym, or on a stationary bicycle, before getting to his desk at 7:45 a.m.
The truth is, no amount of sweat or preparation can guarantee Sunak’s policies will succeed. The biggest factor in determining whether Britain’s economy is permanently scarred or recovers quickly lies beyond the chancellor’s control: the pandemic itself.
If, despite a fast and apparently effective vaccination program, Johnson’s government cannot keep a grip on coronavirus, the U.K.’s plan to reopen the economy on a cautious timetable of dates over the next four months will be at risk. So too will party unity.
“All hell will break loose if the dates are challenged or they slip back,” said Indiana-born Joy Morrissey, who was elected under Johnson’s leadership in 2019. “These dates are the last possible dates everyone is going to accept.”
