Chancellor Jeremy Hunt on Thursday pressed on with preparations to unveil a crucial fiscal statement — which aims to fill a £40bn hole in the UK public finances — on October 31, in spite of Liz Truss’s resignation.
Given that a new prime minister is expected to be in place by October 28, and may decide to appoint a new chancellor, Hunt is operating under conditions of extreme uncertainty.
But the Treasury’s medium-term fiscal plan is hugely important: the de facto Budget is meant to reassure financial markets by showing the UK is on a path to balancing its books and cutting debt as a share of gross domestic product.
Conservative MPs are in a state of disarray and in the event they decided to vote against tax rises contained in the fiscal statement — to be implemented via a finance bill next spring — it could trigger an election.
But one minister said: “Why would we do that? Nobody wants an election. There’s a possibility that people look at the economic outlook and it’s so bad that it actually binds the party together.”
Many Tory MPs, including those who do not count themselves as fans of Hunt, believe he will remain as chancellor under any new prime minister and deliver a package of fiscal measures they can unite behind.
“He’s been brilliant in the last few days,” said one Tory MP who has been briefed by Hunt in recent days. “When you get into these meetings with him, it’s like going into a health spa.”
Hunt on Thursday told colleagues he will not take part in the Conservative leadership contest and he hopes Truss’s successor as prime minister will keep him at the Treasury to deliver the economic strategy.
The Treasury said the intention was for the chancellor to deliver the fiscal plan on October 31, as scheduled, although this would be a matter for the new prime minister.
Sir Graham Brady, chair of the 1922 committee of backbench Conservative MPs, said the aim was to install Truss’s successor on October 28 “before the fiscal statement that will take place on October 31”.
Hunt’s position as chancellor could be secure if Rishi Sunak, one of his predecessors at the Treasury, becomes prime minister. Hunt, who stood unsuccessfully for the Tory leadership this summer, subsequently backed Sunak’s failed bid.
Hunt’s situation as chancellor would become less clear if another Conservative leadership candidate — for example Penny Mordaunt — succeeded Truss.
But whoever becomes prime minister will want to put their stamp on a fiscal plan that will define their premiership, making the Halloween timetable for publication extremely tight.
Under a normal timetable, the Office for Budget Responsibility would be due to receive the main elements of the plan this weekend, but Hunt’s allies insisted the arrangements with the fiscal watchdog could be flexed because of the uncertainty.
Hunt’s expected package of tax rises and public spending cuts to close the £40bn fiscal hole will be politically unpalatable. “There won’t be any attempt to spin it,” said one government official briefed on the package. “It won’t be good news.”
The question facing Conservative MPs — and whoever is prime minister — is whether they have the will and discipline to support the tough measures needed to balance the books and cut debt.
If they balk, there is a real risk markets could start to punish the government again: sterling plunged and gilt yields spiked after Truss unveiled her “mini” Budget involving £45bn of unfunded tax cuts on September 23.
The chaos in parliament on Wednesday, when some Tory MPs rebelled against Truss by refusing to vote for her plan to resume fracking for gas, showed how party discipline is close to breaking down.
Sir Gary Streeter, a former Conservative whip, said delivering a tough and unpopular Budget will be an acid test for a party which was “not far away” from losing its ability to govern.
He added: “We have to remind ourselves that people don’t elect a Conservative government because we’re nicer than the other lot — it’s because of economic competence. If we haven’t got that, we’ve got nothing.”
Hunt’s draft package of measures, according to those who have seen it, will put a greater emphasis on tax rises to fill the hole in the public finances compared to the fiscal consolidation done by chancellor George Osborne in the early 2010s.
Osborne favoured an 80:20 split of spending cuts and tax rises. Hunt is looking at greater emphasis on tax rises, although some Tory MPs are unlikely to swallow the 50:50 mix talked about by some Treasury insiders.
Many Conservative MPs will find it difficult to back any tax rises, given the UK tax burden is heading to its highest level in more than 70 years. Conservative leadership contenders will be under pressure to campaign against big tax increases.
Hunt’s plan is expected to try to limit the risk of a rebellion by Tory MPs by backloading the effects of difficult decisions beyond the next election.
That includes a tough squeeze on “assumed spending” by government departments beyond the current budget period, which runs until 2025. A 1 percentage point cut would mean spending rising in real terms but would save £13bn a year by 2027-28.
Extending the existing freeze on personal tax allowances and thresholds into the next parliament could be a stealthy way to raise £5bn a year.
Other big decisions facing Hunt and the new prime minister — such as allowing more high-skilled migrants into Britain to boost economic growth — could also trigger rebellions.
But having ended the trauma of the Truss premiership, Conservative MPs want to avoid an election. “Why would we have one — we’d be annihilated,” one MP said.
MPs know they have to prove to the country that they can take tough decisions.
Hunt, if he survives as chancellor to deliver his fiscal plan, will tell MPs this is “make or break” for the party, said one official briefed on his thinking.