Analysis | Sunak wins the markets. Voters are another story

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Two short letters have become notorious in UK political history for their frankness about dire public finances. Reginald Maudling, outgoing Conservative chancellor in 1964, told his Labor successor and friend, Jim Callaghan, “Sorry old rooster, leaving him in this condition.” In 2010, Liam Byrne, Labour’s chief secretary to the Treasury, also presented his Liberal Democrat successor, David Laws, with a bogus excuse: “I’m scared, there’s no money.”

Their jokes were hung around their necks by their opponents, but both rang true. Subsequent governments were hampered by the prodigality of their predecessors. Opposition Labor today should remember this as a warning.

While the Office for Budget Responsibility predicts that living standards in the UK will fall by 7% over the next two years (the biggest drop on record), the odds point to an electoral defeat for the Conservatives in two years. The Office for National Statistics estimates that wage increases are easily outweighed by price rises and that the recession will last a year. Middle-income earners – many of whom are Conservative voters – will bear the brunt of tax hikes announced in Thursday’s fall statement.

Prime Minister Rishi Sunak, a former Goldman Sachs Group Inc. banker, has won the markets’ respect for his fiscal conservatism, but he’s struggling with voters. He asks poorly when it comes to “being in touch” and “understanding the lives of ordinary people”. Perhaps we will see less of his Prada loafers and expensive office clothes. The personal is always political. Sunak’s huge private wealth and his wife’s former non-domiciled status (which offered him tax exemption on his overseas earnings) are tempting targets for Labour.

Sunak also misses former Prime Minister Boris Johnson’s X-factor appeal with many former Labor voters enjoying his name-calling of the political class. These changers can return to their old allegiance at the next election. The Conservative Party is demoralized. His favorite newspaper, The Daily Telegraph, asks what is the point of voting for the Conservatives if they are raising taxes and dodging public sector reform. The Institute of Economic Affairs, the UK’s leading free market think tank, accuses the government of “managing the decline”.

If the Tories lose, then Sunak’s earnest 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 economist from England. But the unspoken message will be the same: there is no money.

Labor’s recent 20-point lead in the opinion polls has given the party a boost, although election victory cannot be taken for granted, given the sheer number of seats Labor needs to win to obtain an absolute majority. If they succeed, however, Reeves and his leader Keir Starmer will face a demoralizing conservative legacy. Hunt’s £55billion budget cut pushes back many public spending cuts until after the general election due at the end of 2024.

A centre-left party that has always supported the generous provision of public services will find that the piggy bank is empty. How will labor make a difference if it cannot fund a growth strategy? His ambitious Green Prosperity Plan, unveiled in September and carrying a hefty £28billion price tag, looks vulnerable in current economic conditions. Will Labor also manage the decline?

Long before any election campaign, traps are set for Labour. Hunt can challenge Reeves to go along with her plans or explain how she will find the money to reverse them. As Reeves herself observed in her acerbic response to Hunt in the House of Commons, “The Conservatives want to party like it’s 2010.” That year, Chancellor George Osborne slashed budgets and challenged Labor to say how they would balance the books. Osborne, not coincidentally, was asked to return to Downing Street to give advice on how to snook the opposition.

Yet the last time Labor presented an alternative budget – before the 1992 election – the party was defeated, despite the weariness of 13 years of Tory rule. The Tories and their allies in the press warned of the impending “double whammy” from the Opposition and Labor got no response.

Reeves and Starmer took a different path. Labor has trailed the Tories in economic competence for the past 15 years. Recent market turmoil has finally given them the lead in opinion polls, but that may only be temporary – the last Tory Prime Minister’s unfunded tax cut package led to his expulsion from office .

Labor’s Tony Blair and his shadow chancellor Gordon Brown faced the same dilemma in the 1990s. The Conservative government of the day was beset by divisions, scandals and recent economic failure. But voters still needed to be confident that their money would be safe in Labor’s hands, even as a large majority wanted to spend billions to rebuild rundown schools and hospitals.

Reeves chose to emulate Blair and Brown, pledging that a Labor government would not borrow to fund day-to-day expenditure. She even backed a Conservative cut to the basic income tax rate before it was scrapped a few weeks ago.

But there is a big difference between Labor yesterday and today. In 1997, Blair and Brown were bequeathed strong finances by the Conservatives amid a long post-Cold War boom. Inflation was low and the price of manufactured goods was falling due to globalization. Today, globalization is upside down, war is at Europe’s doorstep and rising interest rates on public debt have left a black hole in the Treasury accounts. The tax burden has reached heights not seen since the Second World War.

We are much closer to the Britain of Maudling’s jerky economy and Byrne’s miserable post-recession crisis. There is a glimmer of hope in the OBR’s optimistic forecast for stable growth in 2025. But Labor cannot count on that yet. More likely, there will be “no money”. The road back to power for the opposition party will be paved by scarcity.

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