Fiscal Conservatism is a Euphemism for Pain

The first draft of this blog was written in the aftermath of Liz Truss and Kwasi Kwarteng’s so called mini budget. When that blew the doors off the British economy, and Kwasi got his marching orders, a second version was written. It focused on the reforms announced in the mini budget around off-payroll rules that were planned for IR35.  But before the popped bubbly had time to lose its fizz, Liz Truss handed control of the economy to Jeremy Hunt.  He lost no time in letting the markets know that the grownups were back in control by shredding the mini budget, and with it Truss’s and Kwarteng’s disastrous libertarian growth plans.  At this point, there was no point in doing another draft of the blog, not with the writing on the wall for Liz Truss. And so, the inevitable happened. Just hours after she stole that line from Peter Mandelson and told the UK and the world that she was a fighter not a quitter, she quit. Now Rishi Sunak has received his coronation and I’m sure he must be thinking how he could have saved the UK the £65 billion pounds it cost to shore up the economy, if only the previous leadership election had been decided among the Tory parliamentary party, and not its 140,000 party members.


Sunak enters Downing St as the first person of colour to hold the office and the youngest PM since Robert Banks Jenkinson, the Earl of Liverpool in 1812. He too was a Conservative who assumed office also aged 42 after the assassination of his predecessor. It could be argued that Rishi Sunak is taking power following the political assassination of his predecessor by Graham Brady, leader of the 1922 committee. But that simply isn’t true. Liz Truss is responsible for her own political assassination. She didn’t need anyone’s help.


Jenkinson became known for the repressive measures he used to restore order, not to his party, but to his country. Rishi Sunak is being urged by the Chancellor he inherited from Liz Truss to press ahead with spending cuts ahead of the Bank of England’s key interest rate meeting on November 3rd. If he listens to Jeremy Hunt, he too will be imposing repressive measures on the British public as he tries to restore order to the UK economy.


A final note on the Earl of Liverpool. When he left office the Tory party was rending itself asunder after dominating the House of Commons for more than 40 years. This current wave of Conservative domination has not lasted quite that long, but a key part of the new PM’s brief is to bring stability to a party that is on its fifth leader and Prime Minister in just six years. He has quite the hill to climb.


Sunak will no doubt be thinking ‘I told you so’, when he looks at the debt pile that Liz Truss managed to oversee in her six weeks or so as PM. He told her during the leadership hustings that her economic policies were bonkers and would raise mortgage interest rates to 7%. Having hit highs not seen since the economic crash in 2008, the two and five year fixed rates as Sunak takes office are 6.55% and 6.43% respectively.  So, he wasn’t far off the mark.


But what can Rishi Sunak and his government realistically do to bring those mortgage rates down? Well, there is some good news. Rishi Sunak has already held the role of Chancellor of the Exchequer. So at least he is financially literate. The other good news is that gilt yields, that is the rate of interest the government must pay to borrow on international markets, has fallen to close to the level they were at before Truss’s mini budget.  The Bank of England’s deputy Governor, Dave Ramsden noted that “Credibility is being recovered, at least on that benchmark measure, but that has to be followed through”.


But the not so good news for the British taxpayer is that Tory MPs are banking on a fiscally conservative economic team of Sunak and Hunt to reassure markets and help to hold down borrowing costs, which will then feed through into lower mortgage bills. Lower mortgage bills are good. But fiscal conservatism is a euphemism for pain, and that pain will be felt in the form of higher taxes and reduced public spending.  The hole these measures must fill is £40 billion pounds deep. Even if this debt is brought under control over five years, that’s £8 billion pounds a year that will come out of the pockets of UK’s taxpayers either in the form of increased taxes or cuts to services.  Rishi Sunak said as much when he spoke to the party faithful at Conservative Headquarters following his election.  He said, “The UK is a great country but there is no doubt we face a profound economic challenge. We now need stability and unity and I will make it my utmost priority to bring our party and our country together”.  In other words, he’s saying that the UK is deep in the muck, but that he’ll do his best.


Had he been elected in the run-off against Liz Truss, his in-tray would have been daunting. Inflation would still be at levels not seen since the 80s, the energy crisis would still have to be dealt with, public services would still have been stretched and industrial unrest would not have just vanished. But in the six weeks since he lost to Truss, she has managed to make the challenge facing Sunak all the harder by deepening a crisis in the public finances and further polarising the factions within the Tory party.


If you’re reading this, it means that UK politics stood still long enough for this blog to not be out of date as soon as it was written. That, in itself, is a positive and hopefully a sign of a more stable economic environment to come, although at a painful cost.


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