by Jeremy Hunt has set a course for the Conservatives that will surely send the party to defeat at the next election. The chancellor, emulating two of his predecessors, can do little and achieve even less over the next 18 months other than his two goals – to oversee a fall in inflation and restore confidence in Britain’s public finances.
The sense of “declinism” that he said on Friday is undermining Britain’s recovery will become more prevalent, not less, under his stewardship, playing into Labour’s hands. Words rather than action will be the order of the day for him, because reducing the annual budget deficit will deny him the funds needed to increase government spending. The right wing in his party will also prevent him from intervening to solve problems that, in their view, should be left to the market.
If Hunt wants to know how this might play out, he would do well to study the experiences of two of his predecessors in No.11 who found themselves in a similar situation – Roy Jenkins and Ken Clarke.
Jenkins, who went on to found the SDP and become Britain’s chief Eurocrat, was handed a poisoned chalice when he took over as Labor chancellor towards the end of 1967. He inherited an economy in shock from a balance of payments crisis and a sharp devaluation of the currency.
The previous Conservative administration of Alec Douglas-Home had embarked on a tax cut that had sent inflation soaring. His chancellor, Reginald Maudling, had promised “expansion without inflation” in the 1963 budget, but the extra cash was used by businesses and households to buy imported goods, leading to a trade deficit. Inflation jumped from 0.8% in July 1963 to 5.6% in April 1965.
Jenkins began to balance the books, persuading Prime Minister Harold Wilson that Labor had no choice if it was to regain the respect of international investors and get the economy going. At Wilson’s expense, a period of austerity through wage restraint and restrictions on public spending came to dominate public debate, pushing large sections of the voting public into the arms of Ted Heath’s Conservatives in 1970.
The history books show that Heath destroyed the good financial situation that Jenkins left him when he embarked on another tax cut. It ended in disaster just a couple of years later – a situation which Labor sought to remove when it regained power in 1974.
Gordon Brown, it must be said, sought to avoid this historical precedent when he inherited the much-improved public finances left to him by Clarke, a Conservative former home secretary who had shed his reputation for toughness by playing a major role in Margaret Thatcher’s fall. .
Clarke became chancellor in 1993 in the wake of Britain’s humiliating exit from the exchange rate mechanism the previous year. That episode, much like the devaluation of 1967, destroyed the government’s reputation for sound economic management. But, like Jenkins, Clarke made a push to regain lost ground through tax increases and spending cuts to balance the books.
He might have succeeded in securing victory for the Tories if the party had not been consumed by allegations of nonsense and dire division over Britain’s membership of the European Union. Clarke had the luxury of four years to turn things around and by 1996 unemployment fell, wages rose and the property market, which had crashed in 1989, began to show signs of life.
From the vantage point of a future chancellor, Jenkins and Clarke did the right thing. They may have cut public investment and thus undermined the economy’s potential for growth. Yet they were careful how they went about stabilizing the public finances after economic disasters, in both cases engineered by the previous Tory administrations.
Hunt finds himself in a similar position to Clarke, but limited to the two years that guillotined Jenkins’ time in the No.11.
Once again it has been a ruthless Tory administration that has forced the Chancellor into a corner. The speeches made by Liz Truss’s chancellor, Kwasi Kwarteng, seemed almost cut and pasted from the Maudlings.
Kwarteng said a boost to growth using tax cuts would have no implications for inflation or Britain’s reputation as a safe haven for foreign cash. It did for both, and in a way that was even more devastating for one group of potential Tory voters – first-time buyers. Part of the inflationary spiral they now face in the form of higher mortgage costs is not picked up in the official consumer price index (CPI) – currently showing annual inflation of 10.5% – which excludes housing costs.
The extra rate rises over the past year, which are forecast to continue this week when the Bank of England meets on Thursday, are largely due to the Truss-Kwarteng debacle, and will add around £3,000 to annual payouts to the average. homeowner who needs to refinance their mortgage.
As Hunt is also forced by his party to play hardball with nurses and teachers over pay, limit spending on everything from prisons to social care, deflect questions about the party leader’s tax penalty and deflect constant criticism from disgruntled supporters of Boris Johnson, surely his goose is already boiled. Like Clarke and Jenkins, he cannot help his party avoid defeat.
