‘Austerity is not just necessary but the ultimate route to prosperity’

‘Fortunately for us, Sunak and Hunt recognise the lessons of history’ (Image: Getty)These colossal problems have been compounded by the fall-out from the disastrous Mini-Budget put forward last month by Liz Truss and her Chancellor Kwasi Kwarteng, who lost their credibility and their jobs with their reckless gamble of massive, unfunded tax cuts.Their replacements Rishi Sunak and Jeremy Hunt have the unenviable task of guiding the ship of state on a steady course through the tempest, without sinking under the waves of bankruptcy or smashing into the rocks of depression. In the whole of the parliamentary Tory party, there are no two figures better suited for this tremendous responsibility.As he proved in his response to Covid, the Prime Minister has a masterful grasp of high finance, while the Chancellor brings a reassuring authority to his role.Moreover, both are cool-headed pragmatists who believe in the principle of sound money and are united in their goal of restoring fiscal stability. Already, simply by returning to office, this pair have dramatically calmed down the markets and boosted the Government’s self-confidence after all the turmoil of the Truss premiership.But their toughest duty lies ahead as they prepare for their Autumn Statement on 17 November, when they will have to set out their plan to fill the colossal £50 billion black hole in the Treasury coffers. It has reported that their drive to balance the books will be based on a 50: 50 split between tax increases and spending cuts. None of this is welcome, especially at a time when the pressure on household budgets is severe and the tax burden is already at its highest for 70 years.As a Treasury source said, ‘It is going to be rough. The truth is that everyone will have to contribute more if we are to maintain public services.’The British state has to live within its means. There is no alternative to prudence, nor is there a magic money tree in Whitehall. As Truss and Kwarteng discovered, the idea that growth can be achieved simply by borrowing more is a dangerous fantasy that spooks the markets, pushes up the costs of credit, degrades the currency, accelerates inflation and causes economic meltdown.If this profligate approach worked, then the most indebted countries on earth would be the richest.Fortunately for us, Sunak and Hunt recognise the lessons of history. They know that economic progress has to be built on firm foundations, not a sea of debt. But that means they will have to make some very difficult choices, particularly if Sunak wishes – as he said in his first speech as Prime Minister – to abide by the key pledges in the 2019 Tory Manifesto, which would rule out increases in VAT, income tax and national insurance or the abolition of the triple lock on the state pensions.There are, however, other options, such as a freeze in the thresholds for the basic and higher rates of income tax, a process known as fiscal drag which could bring in £5 billion-a-year.Further savings could also be made through a 2 percent pay rise across the public sector, which would be an effective hefty cut in earnings given that inflation is running at 10 percent, though the consequence would almost certainly be more industrial action by the trade unions.There would also be a political outcry if the Government failed to raise benefits in line with inflation, but the Prime Minister has not ruled out such a step.More palatable would be an extension of the windfall tax on energy companies, some of which are raking in massive profits. This could be done by keeping the tax in place until 2028, increasing it to 30 percent and expanding its embrace to electricity suppliers.Similarly, a windfall tax could be extended to the banks, whose profits have been boosted by the recent hikes in interest rates.There is also speculation that the Treasury may drop plans to create special low tax ‘investment zones’, fearing that they could cost £12 billion-a-year in lost revenues.Capital spending, including the controversial HS2 railway and other infrastructure projects, could be targeted, though some economists warn that this would sacrifice long-term regeneration for short-term savings.There are no easy options, but austerity is not only necessary and achievable but is also the ultimate route to prosperity. That was proved from 2010 by George Osborne’s spell as Chancellor when he bravely tackled the vast fiscal deficit left by Labour. There were widespread predictions that his programme of heavy cuts would lead to mass unemployment and economic disaster.In fact they led to the opposite, with record levels of job creation and private investment.It is another sign of the wisdom of Hunt and Sunak that they have both sought Osborne’s advice on the Autumn Statement, and have appointed his highly regarded former Chief of Staff Rupert Harrison to their new Economic Advisory Council.These are exactly the kind of safe hands that the economy needs in the turbulence that lies immediately ahead.