Seven long weeks ago, Kwasi Kwarteng was still basking in the aftermath of his not-so-small budget and his promise of unfunded tax cuts, so much so that he promised more to come. It was this intervention, as much as the cavalier no-budget, that helped the markets make up their minds about the direction of the UK under Mr Kwarteng and his impeccable prime minister, Liz Truss. Within hours the pound had fallen and the next day borrowing costs had soared, a sudden and shocking loss of confidence with long-term consequences for government, business and mortgage holders that are still being felt. This morning, Mr Kwarteng’s successor used the Sunday platform to try to reassure us, and more importantly the markets, that he is going to clean up the mess. Jeremy Hunt has only been in the job for six weeks, but he spent as many years as health secretary and his manner was that of a serious news doctor. The message from Dr. Hunt is that while the patient is very sick, there is a cure, but it will hurt. “We will need to raise taxes and cut public spending to show that we are a country that can pay our way,” he told Sky News’ Sophy Ridge on Sunday. “I’m afraid we’re all going to have to pay more taxes.” These are not words that Tory chancellors enter the job dreaming of uttering, but they are based on a diagnosis of the economy that Mr Hunt shares with Rishi Sunak, who is not long out of the job and by some accounts still to try to do it from No. 10. . Use Chrome browser for more accessible video player 2:55 “We will ask everyone to make sacrifices” Mr Kwarteng’s tax cuts have left a £60bn gap – a “black hole” in the political paper – in the government’s plans to reduce borrowing as a share of GDP over the next three years. This calculation matters because it shows that the government has a plan to cover its own expenses, rather than endlessly borrowing to pay for essential services. This gives investors confidence which in turn makes it cheaper to borrow initially. It must be said that the size and scope of the black hole is itself a political choice rather than an economic plausibility. Governments set the fiscal rules for themselves and can change them whenever they want. Mr Kwarteng’s problem was that he presented a plan that did not fit within the rules he said he followed. The Hunt-Sunak challenge is that economic credibility can only be regained by demonstrating a willingness to fill this gap. Read more: Sunak’s premiership is about to really kick off as he faces a massive week on and off Use Chrome browser for more accessible video player 6:39 Three p.m. in three months: A timeline This means announcing plans that on the surface look like they will win over income earners from all income brackets, as well as public services and the people who work in them. If this is the economic rationale behind Mr Hunt’s relentlessly austere messaging since taking the job, how and if he achieves it is political. Having promised in the Conservatives’ 2019 manifesto not to raise any of the main taxes, it is instead likely to freeze the thresholds above which they are paid, meaning that over time more people will pay more tax. (That’s “thieves’ tax” to journalists, “fiscal resistance” in economic jargon, and “less money” in the real world.) As for spending cuts, they are less clear and may remain so after Thursday’s autumn statement. Mr Hunt appeared to pledge again to increase pensions in line with inflation under the “triple lock”, but was clear that striking nurses would not get an inflation-protected pay deal. Use Chrome browser for more accessible video player 1:58 The rise and fall of Kwasi Kwarteng From there we wait to see how much detail is offered and how much it means even if it is. Mr Hunt will set economic expectations for the next five years, with a forecast for the same period from the Office for Budget Responsibility that investors will read as closely as the autumn statement itself. But three of those years lie beyond the current parliament, meaning that a new government, or as we’ve seen even a new prime minister, can change course if it chooses. Click to subscribe to Sophy Ridge’s podcast on Sunday So the measures we will hear next week are politically non-binding. Some may even be intended as a trap for Labour, an attempt to commit the opposition to unpopular decisions in advance. However, there is no doubt that the financial risk is real. Inflation is over 10%, the energy crisis continues and we are on the brink of a recession that will see interest rates rise further. And there is no magic cure.
