Painful choices for Sunak

THe word austerity gained a bad reputation after the financial crisis when labour left behind a budget deficit of £150bn. At the election campaign in 2010, all the parties adopted a responsible, hair shirt approach to cutting government borrowing and debt.

it was left to then chancellor George osborne to take the tough steps to restore the budget to near balance.

A period marked by budget cuts, a squeeze on real earnings and low growth was described as ‘austerity’ in spite of a jobs miracle which saw unemployment tumble.

Rishi sunak has an equally formidable post-pandemic task.

The budget deficit is projected to hit £234bn in the current fiscal year, including £132bn of Covid-19 spend. The Chancellor will be helped by a robust recovery.

The bank of england forecast suggests that the upturn will lose some momentum in the third quarter but the economy is still expected to grew by 3pc.

it should return to pre-pandemic levels by the end of the year.

biggest surprises have come from the labour market. The concern has been that a substantial number of the 4m-plus people on furlough might end up on dole queues, putting additional pressure on welfare spending. That isn’t happening. latest data suggests that the numbers of workers on furlough has dropped to around 1m.

Half of those are on flexible working, meaning that they are all but certain to be re-employed full time.

As for the other half, there is confidence that employers would not be paying national insurance and the current 20pc of wages unless they intend to press the restart button. The issue for the jobs market is going to be one of shortages. Vacancies are at high levels especially in hospitality, logistics and health and social care.

When it comes to framing his multi-year public spending review and autumn financial statement (a budget is now unlikely until the spring) the Chancellor will want to avoid being pinged with the word austerity. He will point out that the last few years have seen a big expansion in the public sector, amounting to £100bn or around 3pc of GDP.

sunak is going to have to make hard choices. Debt is at close to 100pc of GDP. A combination of the cost of servicing inflation-linked gilts and the bank of england’s bond buying means that even the ‘modest’ tightening of policy unveiled at its August meeting this week will have a deleterious impact on the public finances.

The overseas aid budget already has taken a hit. The Government has provided just £1.4bn of extra spending on post-Covid education remedies after a review called for up to £15bn. There will be more hard decisions to come.

AVeRAGe earnings are climbing fast as a result of pandemic distortions. The triple lock, which pledges the best of consumer price inflation, 2.5pc or average earnings to state pensioners, is in the sights of the Chancellor. ending the triple lock would break a manifesto commitment but could reduce government bills by £4bn.

it now looks increasingly likely that the Government will try to address the vexed problem of spending on social care this autumn. The fairest option is seen as an increase in national insurance contributions (NICS).

A rise in the NIC is seen as an appropriate choice as it is levied on everyone in work below state retirement age, though in future older employees may be asked to pay too.

When it started in 1948, national insurance was intended to be a cradle-to-grave levy. in the mind of citizens, there is a direct connection to social care, even though at present the funds raised go directly into the exchequer, along with income tax, VAT and other levies.

The employers contribution, paid by businesses, looks to be an obvious target.

but there could be a double gain to revenues if there were a 1pc surcharge on both employer and employees.

The pressures on the Chancellor are considerable. Calls for the £20 a week rise in Covid universal credit to be made permanent are unlikely to be heeded.

Revenue gains made as a result of stronger-than-forecast tax revenues from the return to work and higher consumer spending will be eaten up by interest rate costs.

With state spending so elevated, it may be hard for critics to scream austerity.

but for those being asked to make sacrifices, it may feel like it.