Sunak faces the free-marketeers

Rishi Sunak didn’t give too much away tonight when he spoke in the 'ThinkTent' at Conservative Party Conference. The Chancellor is known for being cautious with his words, and has been increasingly tight-lipped in the weeks leading up to his October Budget. But his presence at the fringe event was telling in itself.

Sunak was only billed for one public fringe event this year, co-hosted by the Institute of Economic Affairs and Taxpayers’ Alliance. Their ‘ThinkTent’ boasts some of the most free-market, libertarian events you’ll find at conference: both organisations are strong advocates for a low-tax, smaller state.

So, not necessarily an obvious place to find the Chancellor who has overseen record peacetime spending over the past 18 months. Or the Chancellor who designed an internationally-famous scheme in which government paid the wages of over 11 million people throughout the pandemic. In the next few years, Sunak admits he will preside over record-high state spending. Measured as the proportion of GDP, state spending will grow to ‘the other side of 40 per cent by the end of this parliament,’ he tells the Tent. ‘That will be a historically high level for us.’

Still, Sunak showed up to make the case for his policies to a jam-packed audience – no doubt many of whom will disagree with the current approach. He volunteered to take some of the most difficult questions he might get from his side of the economic aisle. When grilled on how much more tax could feasibly be raised, he agreed it was probably nearing the limit. ‘That’s what spending reviews are about,' he says. 'We can’t do absolutely everything that everyone wants, (even) within a pie that is large by historic standards. And I think everyone needs to remember that going into the Spending Review.'

Paying for spending sprees was a big theme in tonight’s fringe event, just as it was in his keynote speech yesterday. The National Insurance rise, he said:

“ ‘Crystallised, I think, for a lot of people not just in the parliamentary party, but in the country as well, a reminder that things have to be paid for. I think people are now approaching those discussions with a sense of realism about what is and what isn’t possible...gosh, wouldn't it be nice once day to be able to start reducing the tax burden.

Who are those people? The era of big spending has become intoxicating not just to parties on the economic left who often call for more state intervention, but to the Conservatives too. Sunak had the tough gig before his March Budget of explaining to his own party's MPs why boosting day-to-day spending without finding the cash to pay for it was a dangerous move. More recently, he's thought to have convinced the Prime Minister that any spending spree in the future, like on the NHS, must also be costed.

Sunak defended the decision to hike NI specifically, arguing its historic link to NHS funding, the fact that the burden is on business too (saying that if it had been done through income tax, the rise would have been more than 2 per cent), and that choosing a UK-wide tax was important for ‘those of us who believe in the Union’.

Difficult arguments to make amongst free-marketeers, who might ask why the Chancellor would decouple ‘business’ from people  and whether or not there are better bonding activities for the devolved nations than a tax-raising exercise.

But the Chancellor’s fiscal discipline shone through, especially on the NHS. On whether the £12 billion extra per year for health and social care would be wasted away, Sunak said that it’s 'reasonable that we hold the NHS to account to make sure the money is well spent,' and that eventually the money ‘transfers to social care.’ A tricky business, clawing money back from the health service.

But this is the Chancellor’s main selling point now, one that he’s been explicit about this conference: fiscal responsibly is his main priority, above his other economic principles. 'Our best protection against future threats’ he told the Tent, ‘is just to have fiscal headroom.' Is this still driven by his fears over inflation? Tonight he played them down, noting multiple times that the Bank of England considers the recent spike (now forecast to rise to over 4 per cent by the end of the year, twice the Bank’s target), as temporary: ‘The working assumption is that most of the pressures we’re seeing are transitory in nature, they’ll work their way through the system’. 

But this came with major caveats, as well as the acknowledgement that the Bank itself admits it’s been undershooting its forecasts. ‘Our debt is sensitive...we’re about twice as sensitive as before Covid, and five to six more times more sensitive than we were before the financial crisis.’ Something the Chancellor says he ‘grapples with.’ The numbers still weigh on his mind. Small changes to borrowing conditions could have big implications: a ‘change in rates and inflation costs us about 20 billion pounds a year'.

So: no tax cuts anytime soon. But what might make the Chancellor change his mind? The signal, Sunak gave, would be ‘what’s happening to our debt. Is it continuing to go up and up and up on our watch, or is it starting to go down?’

Strip back the ways Sunak often couches his points, and the message is clear: his mission is to get his party’s spending under control. Which perhaps explains his presence in the ThinkTent tonight: it’s a fiscally conservative message after an 18-month Keynesian spending spree.

‘No Chancellor, especially not a Conservative Chancellor, especially not me, wants to have to do those things. But they’re borne of necessity.’ The questions remains whether he’s convinced the most free-market minds in the party’s base. Simply judging on the selfie-swarm that surrounded Sunak as he made moves to leave the Tent, perhaps some were.

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