Sunak must find balancing act to slash debt but avoid recession

Looming this week is the Chancellor’s statement. Nominally it is called the Chancellor’s statement but much of it will originate from Number 10 and will be regarded as such. This means the statement will be as much a political event as an economic one.Both Sunak and Hunt have been brutally frank in stating that the country faces a serious economic crisis. Swingeing spending cuts and significant tax increases are in prospect. Manifesto pledges can no longer apply.Keir Starmer would have us believe that this is all of the Government’s making. While the mini-budget damaged the Government and upset the markets, the greater part of our present problems reflect global factors: the cost of Covid, the sharp rise in energy prices and the war in Ukraine. Did anyone seriously believe that the furlough scheme or the energy price guarantee just came free as a gift from the Government?The immediate issue is how to plug the so-called ‘black hole’ in the national finances. The task is to get the country’s debt back to a level that is sustainable – in other words, affordable. Governments, just like individuals, are affected by interest rates and inflation.Thursday’s statement will be a difficult balancing act. The Government has to get the nation’s finances back in order, get inflation down, and at the same time avoid plunging the country into a deep recession. It will require consummate skill and a degree of luck.The dangers were illustrated with the third-quarter figures for GDP, the growth of our economy, which showed a slight fall. The Bank of England has warned of the possibility of a long recession. So there is a risk of the government doing too much as well as too little.The PM and the Chancellor will have to decide how much of the belt tightening is to come from tax increases and how much from cuts in public expenditure. Many Tory MPs favour the latter. But they should remember that inflation at 10 percent is already imposing deep cuts on public services on which many of the most vulnerable rely.Trying to protect vital public services from cuts caused by inflation will mean holding public sector pay well below the level of inflation. That may be difficult for people to accept and we may have a Christmas of discontent. The PM will need to make tough financial decisions in the upcoming Autumn Statement (Image: Getty)But it is absolutely necessary the Government makes clear it will hold the line so that wage increases do not cause inflation to become embedded. Unfortunately the rise in imported energy prices inevitably means a fall in living standards,The Government will be reluctant to increase income tax or VAT. For that reason much of the tax increases may come from extending the freeze on personal allowances and tax thresholds – the level of income at which people pay a particular rate of tax. The freezing of tax thresholds may be extended to other taxes also like inheritance tax.The biggest spending issue is whether the Government will keep the triple lock – the commitment to increase pensions by inflation, earnings or 2.5 percent, whichever is the greater. Economic arguments by themselves point to breaking the link.It is very expensive and difficult to justify paying inflation-linked increases to pensioners while most working people are going to have to settle for below-inflation increases. Better to pay only the poorest more. But politics points the other way, and that is where the Government will probably go.Difficult as the situation is, it’s important not to overdo the gloom. Contrary to much of what is written Britain is not doing significantly worse than other countries. Germany, France and Italy all face similar challenges. We will get through this.This week will be an important one for Rishi Sunak whose career has been a preparation for this moment. He is exceptionally able and has the capacity to be an outstanding leader. Keir Starmer thinks his weak point is that he is rich. But he has gone into politics for the right reasons, not because he needs to but because he wants to do good thingsWe need competence. But competence is not enough. We need inspiration and ideas for the longer term for increasing prosperity. How long will taxes remain high? How will we get more people back into work? Our new young PM has that ability to be imaginative to develop and grow. After this week his task will only just be beginning.