Sunak’s Summer of Love With British Voters Faces Its Reckoning

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Rishi Sunak will on Monday stop picking up part of the tab for millions of Britons’ dinners. It marks a turning point for a chancellor whose ambitious spending in the early days of the Covid pandemic turned him into the most popular of Boris Johnson’s cabinet colleagues.

In coming months, he will start scaling back policies that saw the U.K. government pay part of workers’ wages for the first time and guarantee loans to businesses. For a Conservative like Sunak, such spending is, in his words, “not sustainable” with thenational debt surpassing 2 trillion pounds ($2.7 trillion) for the first time in history.

“This is now the acid test,” Professor Andrew Russell, head of politics at the University of Liverpool, said in an interview. “It’s easier to look benevolent when you’re loosening the purse strings than it is when you’re tightening them again.”

The problem for the chancellor is that the coronavirus pandemic has morphed from the short, sharp shock the government had expected into a chronic condition. That’s left him under pressure to go on spending — with businesses warning that withdrawing measures like furlough payments too soon will trigger a wave of mass unemployment.

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So far,Sunak’s popularity has been able to defy the economic data thanks to his willingness to act swiftly and boldly. An estimated more than 190 billion pounds of extra spending and tax cuts this fiscal year still failed to prevent an economic catastrophe, with the U.K. posting the biggest economic contraction of any major European country in the second quarter. As he starts to cut spending and raise taxes, that goodwill will be tested.

”The whole world is suffering a downturn on the back of Covid-19, but the U.K.’s recession is deeper than any other in Europe or the G-7,” said Anneliese Dodds, the opposition Labour Party’s shadow chancellor. “That wasn’t inevitable -– it’s the result of political choices by the U.K. government.”

While Sunak’s critics acknowledge that he moved swiftly in response to the coronavirus, they single out the inflexibility of his measures. Small companies found it hard at first to access emergency loans; his income-support programs didn’t cover millions of self-employed workers or allow employees to return to work part-time at first; and his plans to end the furlough program in October threaten jobs in specific industries like travel that are still reeling from of the virus.

Eat Out to Help Out, which offered diners half-priced meals in a bid to woo Britons back to restaurants, though small in terms of cost, is emblematic of Sunak’s response: Developed at speed, the policy cast aside U.K. fiscal orthodoxy -- and proved popular. The plan has already subsidized 64 million meals, and led to a marked increased in bookings on the days it covered.

But it’s also a microcosm of the flaws in the chancellor’s response to the Covid crisis: the cost islikely to surpass the Treasury’s initial estimate of 500 million pounds -- and in the rush to implement the program, some customers were able to game the system to claim discount take-outs. For the Treasury, that’s a small price to pay for saving an entire industry.

Sunak’s biggest battle will come in October, when he ends the furlough program, under which the government has been paying as much as 80% of workers’ wages. With the crisis dragging on, a number of European countries haveextended similar measures: Germany is now committing to provide aid until the end of next year. U.K. businessesargue the chancellor will need to continue support in some form.

“The job is not yet done,” British Chambers of Commerce Director General Adam Marshall said in an interview. “The chancellor is going to have to be bold, be radical and put in place some significant new forms of support to help not just the restart, but the rebuild as well.”

Sunak’s argument is that the program, which has already cost the Treasury more than 35 billion pounds, can’t go on indefinitely. It leaves firms at risk of becoming hooked on government aid and worker tied to jobs that no longer exist while their skills go stale. The national debt, meanwhile, is now above 100% of GDP for the first time since the early 1960s.

“We’ve been clear these schemes are temporary and it would not be sustainable for them to continue indefinitely,” the Treasury said in a statement.

But removing the support too early could mean the billions of extra spending were in vain. TheInstitute for Public Policy Research estimates the jobs of two million people reliant on government aid would be sustainable if it were extended into next year.

“The success of the schemes ultimately will be judged on how effectively the exit is managed,” said Peter Dixon, an economist at Commerzbank AG. While the Treasury has done a “great job so far,” he said that “if all we do is postpone the pain for six months then that’s a lot of money spent and no ultimate benefit in terms of the effect on the labor market.”

Sunak will also have to make tough choices on taxes later this fall. With Johnson’s manifesto ruling out increases in income and sales taxes, his room for maneuver is limited -- and there’s the risk that any unpopular measures could jeopardize his standing with voters.

“That underlying reservoir of public confidence that he has ought to protect him,” said Russell. “But it could be a very bumpy ride indeed -- and who knows how long that goodwill will last.”

— With assistance by Andrew Atkinson

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