British politics after the Spring Statement: “It’s the economy, stupid.”

Matthew Elliott, Senior Political Adviser and Dr Clive Black, Head of Research

Everybody knows that Boris Johnson’s political hero is Winston Churchill – he even wrote a bestselling book about him. With the Russian invasion of Ukraine, and the West coming together to support President Zelenskyy and punish Putin and his cronies, the PM is in his element on the international stage, and ‘Partygate’ seems like a long time ago. The war is not the first challenge he has faced in his comparatively short time in No10 – ‘Getting Brexit Done’ and steering the country through the coronavirus pandemic are both significant obstacles that voters generally give him credit for handling with aplomb.

But as Churchill found in 1945 – the post-war general election which the Labour Party won by a landslide – there isn’t a huge amount of gratitude in politics. And the same will be true for Boris Johnson when it comes to the next general election, which has to take place by 12th December 2024, but could be called as soon as next year. As he knows full well, he won’t be able to float to victory on his record on Brexit, Covid and Ukraine; voters will need to feel more inclined towards ‘Better the devil you know’ than ‘Time for change’ – the two key drivers in any election campaign.

The ace card that the Conservative Party usually has in any election is the longstanding perception that it is better at handling the economy than the Labour Party. The political cycle often follows the economic cycle: Labour gets elected when the economy is strong, because voters feel they can afford for the Government to be a little more generous with the public purse (e.g., 1997); and when the country encounters economic difficulties, voters turn to the Conservative Party to fix the problem (e.g., 2010).

Boris Johnson’s political future therefore lies, to a large extent, in Rishi Sunak’s hands. No Chancellor fully controls the economy (Sunak is as frustrated with the current global inflationary pressures he’s facing as Gordon Brown was with the fallout from the 2007-08 international Financial Crisis), but unless voters feel that the Government has got a grip on the cost-of-living crisis by the time they come to vote, it is easy to see why they might decide to give the other side a punt.

The Chancellor knows this, and it was clearly at the forefront of his mind when he stood up to deliver the Spring Statement yesterday. When he sat down, the tweets from Government and Conservative accounts trumpeted “We’re cutting taxes for hardworking people”, pointing people to the alignment of the National Insurance and Income Tax thresholds, the 5p cut to fuel duty, and the 1p cut to the basic rate in 2024. All positive announcements, but unlikely to detract from the rise in the overall tax burden forecast by the Office for Budget Responsibility (OBR) from 33% of GDP in 2019-20, to 36.3% in 2026-27 – the highest level since the late 1940s. Nor will it lessen the intergenerational shift in economic fortunes, from moving the tax base from Income Tax to National Insurance, and from inflation helping pensioners through the triple lock whilst hammering graduates through increased student loan repayments.

And inflation is the nub of the problem. Rishi Sunak was alive to the threat of inflation from late 2020, when others (including the Governor of the Bank of England, whose economic forecasts have been poor) were still talking about the threat of deflation, and the need to explore negative interest rates. It was announced yesterday that CPI inflation has risen from 5.5% in January to a 30-year high of 6.2% in February, and with the inflationary effect of the war and energy crisis, could well hit double digits this year. This will be a huge hit to the cost-of-living which few people fully appreciate (the Chancellor and his team excepted).

According to yesterday’s forecasts, the country will have to spend £83bn servicing our debt interest – more than we have ever had to spend before. This will have a knock-on effect on government spending, with welfare benefits falling almost 5% in real terms in 2022-23, and government departments seeing their budgets fall in cash terms by between £5bn and £17bn from the amounts set in October’s Spending Review. And for households, as fixed rate mortgage periods come to an end, higher interest rates will mean substantially higher mortgage repayments – the biggest component of many household budgets. This will require belt-tightening all round, not just by households and businesses, but also across the public sector.

The OBR currently expects inflation to be back under control by 2024. If this is the case (and I would consider that to be a heroic assumption), then the backdrop for the next election will be more benign. But with the current energy crisis being of a similar magnitude to the oil price shock of the early 1970s, and with the war and sanctions having a chilling economic effect in the West as well as in Russia, the outlook could well be less rosy than predicted – that would be my working assumption.

I began by drawing parallels with the 1945 general election, where the electorate respected Churchill but placed their post-war future in Clement Attlee’s hands – a public spirited but slightly pedestrian figure about whom Churchill once quipped, “An empty taxi pulled up and out stepped Clement Attlee”. Just as Attlee lacked Churchill’s charisma, Keir Starmer is grey and flat compared to Boris Johnson. But with the inclement economic backdrop, and Labour currently leading the Conservatives in some polls for economic competence and ability to deal with the cost-of-living crisis, the Conservatives have some ground to make up. And they now face a more competent Shadow Chancellor than previously – Rachel Reeves is doing an effective job shifting Labour onto more mainstream economic ground.

The election doesn’t need to be called for another two and a half years. There will be many Budgets between now and then. The inflationary clouds might pass as quickly as they gathered. But what is clear is that the economy and cost-of-living will define the Government’s political fortunes. Gratitude alone won’t win the next election, and it was notable that levelling up only got a fleeting mention in yesterday’s Statement. People need good reason to trust the Government with their future. As James Carville famously said in his campaign to elect Bill Clinton to the White House and remove the Republicans from power after 12 years of office: “It’s the economy, stupid.”