Sunak wins over the markets. Voters are a different story

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Two short letters have become notorious in UK political history for their frankness about the dire state finances. Reginald Maudling, outgoing Tory Chancellor in 1964, said to his Labor successor and friend Jim Callaghan: “Sorry old dick to leave it this way.” In 2010, Liam Byrne, Labor chief secretary at the Treasury Department, his Liberal Democrat successor, David Laws, also made a mock apology: “I’m afraid there’s no money.”

Their jokes were hung around their necks by their opponents, but both had the ring of truth. Subsequent governments were hampered by the prodigality of their predecessors. Today’s opposition Labor Party should remember them as a warning.

With the Office for Budget Responsibility forecasting that living standards in the UK will fall by 7% over the next two years (the steepest fall on record), the odds point to an election defeat for the Conservatives in two years’ time. The Office for National Statistics estimates that wage increases will be slightly outpaced by price increases and that the recession will last a year. Middle earners – many of them Tory voters – will bear the brunt of the tax hikes announced in Thursday’s autumn statement.

Prime Minister Rishi Sunak, a former banker at Goldman Sachs Group Inc., has earned the respect of the markets for his fiscal conservatism, but he is fighting with voters. He fares poorly on “being in touch” and “understanding the lives of ordinary people.” Maybe we’ll see less of his Prada slippers and expensive office clothes. The personal is always political. Sunak’s immense personal fortune and his wife’s former non-resident status (which gave her a tax exemption on her foreign income) are tempting targets for Labour.

Sunak also lacks former Prime Minister Boris Johnson’s X Factor appeal with many former Labor voters who enjoyed tormenting the political class. These changers could return to their old allegiances at the next election. The Conservative Party is demoralized. Your favorite newspaper, The Daily Telegraph, asks what is the point of voting for the Tories if they are raising taxes and shirking public sector reform. The Institute of Economic Affairs, Britain’s leading free market think tank, accuses the government of “managing the decline”.

If the Tories lose, Sunak’s reputable Chancellor of the Exchequer, Jeremy Hunt, will not fall into the trap of writing a tongue-in-cheek surrender note to his likely successor, Shadow Chancellor Rachel Reeves, a former Bank of England economist. But the unspoken message will be the same: there is no money.

Labor’s new 20-point lead in opinion polls has given the party a boost, although victory cannot be taken for granted given the high number of seats Labor must win for an outright majority. If they triumph, however, Reeves and their leader Keir Starmer will have to contend with a demoralizing Tory legacy. Hunt’s £55 billion budget crisis is pushing back many public spending cuts until after the expected general election at the end of 2024.

A centre-left party with a history of supporting generous public services will find the piggy bank 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 £28 billion price tag, appears vulnerable in the current economic conditions. Will Labor even manage to decline?

Labor traps are laid long before an election campaign begins. Hunt can challenge Reeves into accepting his plans or outline how she will find the money to reverse them. As Reeves herself noted in her scathing reply to Hunt in the House of Commons, “The Tories want to party like it’s 2010.” That year Chancellor George Osborne slashed budgets and asked Labor to say how they would balance the books . It was not by accident that Osborne was invited back to Downing Street to offer advice on how to snooker the opposition.

But the last time Labor presented an alternative budget – ahead of the 1992 election – the party was defeated despite fatigue after 13 years of Tory rule. The Conservatives and their allies in the press warned of the looming ‘double taxation’ of the opposition and Labor had no answer.

Reeves and Starmer took a different path. Labor has outpaced the Tories in economic literacy over the past 15 years. The recent market turmoil has finally given them the lead in opinion polls, but that may only be temporary – the last Tory prime minister’s package of unfunded tax cuts led to her being ousted from office.

Labor’s Tony Blair and his shadow chancellor, Gordon Brown, faced the same dilemma in the 1990s. The Tory government of the time was beset by divisions, scandals and recent economic failures. But voters had yet to be persuaded their money would be safe in Labour’s hands, even as a large majority wanted to spend billions on rebuilding derelict schools and hospitals.

Reeves has chosen to emulate Blair and Brown by pledging that a Labor government will not borrow to fund day-to-day spending. She even backed a Tory cut in the property tax rate before it was dropped a few weeks ago.

But there is a big difference between Labor then and now. In 1997, the Tories bequeathed Blair and Brown solid finances amid a long post-Cold War boom. Inflation was low and prices of manufactured goods fell due to globalization. Today, globalization is in decline, war is on Europe’s doorstep, and rising interest rates on government debt have left a black hole in Treasury accounts. The tax burden has risen to levels not seen since World War II.

We are much closer to the UK of Maudling’s sputtering ‘stop-go’ economy and Byrne’s miserable post-recession bust. A glimmer of hope beckons in an upbeat OBR forecast for steady growth in 2025. But Labor cannot count on that just yet. It is more likely that there will be “no money”. The path back to power for the opposition party will be paved with poverty.

More from the Bloomberg Opinion:

• The UK household’s deadly silence on housing: Therese Raphael

• Great Britain could use a World Cup win – for business: Andrea Felsted

• Britain already has an ugly wealth tax: Merryn Somerset Webb

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Martin Ivens is editor of the Times Literary Supplement. He was previously Editor-in-Chief of the Sunday Times of London and its chief political commentator.

More stories like this are available on bloomberg.com/opinion

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