Sunak threatened by new winter of discontent after UK recovery fizzles out

Rising prices, queues at the petrol pumps and a flatlining economy provide a sobering backdrop to Rishi Sunak’s speech at the Conservative party conference in Manchester on Monday .

The outlook was more promising only three months ago when the UK was recovering quickly from the lockdown restrictions imposed at the start of the year.

Sunak could then point to a growing economy and record job vacancies as justification to wind up a furlough scheme that staved off mass unemployment during the pandemic. But as activity has slowed, that decision has come under scrutiny.

Boris Johnson’s 41-year-old chancellor was not born when Ted Heath’s government was knocked off course by the oil shock of 1973 or when Jim Callaghan faced the winter of discontent of 1978-79, but he will be alive to talk that Britain is witnessing a rerun of that difficult decade.

Sunak will use his speech in Manchester to stress that government support for the labour market will continue now that wage subsidies have ended, but in a different form. The chancellor will say that the next phase of his “plan for jobs” requires investment in skills and help for those looking for work. The budget at the end of the month will contain employment measures, although they will not be nearly as expensive as the £70bn spent on the furlough.

The end of the stamp duty holiday, higher VAT in the hospitality industry and less generous universal credit payments mean the most immediate task facing Sunak is to prevent the economy from going backwards over the coming months. It is a big challenge, but not the only one.

There was good news and bad for the chancellor from the Office for National Statistics last week. The good news was that the economy grew more quickly in the second quarter of 2021 than previously thought. The bad news was that faster growth increases the chances of a rise in interest rates from the Bank of England.

With the Cop26 climate change conference only a month away, the government faces a dilemma. The prime minister wants to show other countries that the UK is serious about achieving carbon net zero by 2050, but poorer households suffer disproportionately from higher energy prices, which cut living standards by increasing the cost of heating a home or driving a car. There is a tension to address between the government’s levelling-up agenda and its green agenda.

There were reports last week that Johnson plans to shift green surcharges from electricity to gas, to encourage consumers towards lower-carbon alternatives. But the plan will be phased in over a decade and have no impact on the overall level of bills.

Sunak, therefore, has to decide whether he wants to spare motorists yet again from higher excise duties on petrol and diesel at a time when the government is seeking to burnish its environmental credentials.

A second big challenge involves the public finances. After a year that saw public borrowing reach levels unprecedented in peacetime, the chancellor insisted that higher spending on the NHS and social care had to be matched by an increase in revenues. His chosen method to achieve this was the 1.25% increase in national insurance contributions for both employers and employees, announced last month.

Higher NICs make it more expensive to hire labour and, when they come into force next spring, will leave tax as a percentage of GDP at its highest sustained level on record. Expect Sunak to insist on Monday that the Tories remain the party of low taxation. If not quite yet.

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