As he stood on the steps of Downing Street for the first time as prime minister, Rishi Sunak said the task at hand was simple. Britain was facing a profound economic crisis, reeling from the mistakes of his predecessor, the Covid pandemic and Russia’s war in Ukraine. Confidence and stability had to be restored.
This week Sunak will reach 100 days in power – already more than twice Liz Truss’s disastrous tenure. But while progress has been made since last October to repair the damage of the “true Tory budget”, stopping the bleeding was the easy bit. When it comes to restoring confidence with a vision for the future of Britain’s economy, no clear direction has been set.
Since entering office, Sunak has been treading water, in a term punctuated by rolling political scandal and strikes. His stubborn refusal to budge on public sector pay – at a time when the health service is in crisis, and with no sign of resolution in sight – only adds to the impression that Sunak is a man without a plan.
There is no sense of where the country and its economy is heading under the Tories. As a former chancellor, the economy ought to be Sunak’s strong suit. Yet it is rapidly becoming his achilles heel as prime minister.
In the vacuum created by the lack of a credible vision, Team Truss is regrouping from what ought to have been oblivion, founding the Conservative Growth Group to criticise Sunak’s brand of spreadsheet managerialism and push for a change of tack. On the left and right of politics, talk of a renewed period of British economic decline has set in.
Last week, Sunak’s chancellor, Jeremy Hunt, said this narrative of declinism was “just wrong”, in an upbeat speech designed to quiet the government’s critics. There was plenty to be cheerful about, Hunt said, and a new “plan for growth” founded on Brexit and boosterism could avert a future of economic irrelevance.
It was a tough sell – not least because of the clear economic damage of Brexit, regardless of whether it was politically desirable or not. Business leaders criticised the speech for its “empty” rhetoric. They said there were no new ideas, policies or points for action. Zilch.
Sunak may have a list of five targets for 2023 – including three economic goals: halving inflation, reducing the national debt and growing the economy – but they are vague ambitions, not strategies, while little positive action has been taken to achieve them. Only in the negative sense are they deployed: as five reasons to turn down demands for tax cuts, higher spending, or public sector pay increases.
Some of the intransigence could be simple posturing before the March budget. Closing down unwanted requests and setting expectations low before announcing a comparatively more generous-sounding package are tried and tested Treasury tricks.
After the car crash of the Truss mini-budget, there is also a logic behind the reluctance to loosen the government purse strings. But the bigger danger is oversteering. Given the economic mess facing Britain, sitting on the sidelines eyeing the spreadsheet of the public finances for reassurance is penny wise and pound foolish.
Team Truss is right to point out the risks of inaction, but their solutions are the wrong ones. Lowering the headline rates of income tax, especially for the wealthy, would be wasteful, divisive, and would do little for Britain’s long-term growth prospects.
Instead, the government must take targeted action to get the economy moving, deploying tax cuts and public spending aimed squarely at boosting longer-term productive capacity, with an overarching industrial strategy required to set the direction.
Over the past 15 years, the UK’s gross fixed capital formation – a term in economics for the type of public and private investment considered vital for growth – has lagged that of G7 countries as a share of GDP by about 2–8 percentage points.
Economists reckon this dismal investment picture is among the key reasons why productivity has stalled. Without investment to achieve efficiency gains, economic growth has been lacklustre, allowing for the conditions where workers’ pay in real terms is no higher today than it was in 2007.
What is strange is that Sunak once recognised this problem. As chancellor, his Mais lecture a year ago this month set out a vision for boosting business investment. A Treasury team was commissioned to plan a policy of business investment relief to encourage long-term, growth-enhancing, greener spending. Support worth up to £11bn a year was being considered.
Yet Sunak as prime minister appears to have jettisoned his own idea. Instead he is frozen in the headlights of the country’s dire economic position, betting that sitting still and doing nothing is the best strategy for Britain. Perhaps invoking the intransigence of his political hero, Margaret Thatcher, is the plan? But this is not the 1980s, while her brand of neoliberal economics has fallen out of fashion around the world for good reason.
It is time for a change of course. Business leaders are clamouring for more close partnership with government. Stepping aside is a useless recipe for boosting our languishing investment performance, particularly at a time of vast economic uncertainty.
With a budget in less than two months, the time now is for action.
