Are Sunak and Hunt planning a windfall tax grab?

When Rishi Sunak entered No. 10 on Tuesday, he paid lip service to the aims of his predecessor. Liz Truss ‘was not wrong to want to improve growth in this country’, he said outside Downing Street. But ‘mistakes were made’ which is why he was installed as Prime Minister: to fix the economic fiasco that has overwhelmed Britain over these past few weeks.

This morning’s news about looming growth forecasts brings both statements to the fore. Just over a week ago, Chancellor Jeremy Hunt thought he had to find upwards of £30 billion worth of spending cuts and tax hikes to fill the black hole in the public finances. But Treasury officials have told the BBC that Sunak and Hunt together may be looking for something closer to £50 billion to get the public finances back in order.

Why the hike? It’s thought that the Office for Budget Responsibility (which was cast aside for the mini-Budget but will be on full show for the Autumn Statement) will be downgrading its growth forecast for the economy. Given recent forecasts have been pretty gloomy, this spells bad news for Britain. The most recent predictions from the Bank of England show growth flatlining for not just months, but years to come. While the UK has so far avoided two consecutive quarters of negative growth, Ross Clark notes on Coffee House that evidence of the economy dipping into recession this autumn is already leaking through.

Potentially having to find billions more through tax hikes and spending cuts because of poor growth forecasts is sure to focus minds. GDP isn’t just a number on a spreadsheet, but a determining factor in people’s standards of living. It’s a reminder, as Sunak acknowledged this week, that Truss accurately diagnosed Britain's long-term problem: stagnant growth.But it will also vindicate Sunak’s point that ‘mistakes were made’, to put it lightly. The sky-high debt and deficits created by all the emergency spending during the pandemic needed to be tackled before big tax cuts were announced. Spooking the markets with more unfunded spending — a point he painstakingly made during the summer leadership contest — has put the UK in an even more difficult spot. He now has to prove to markets that the government is committed to fiscal discipline.

The OBR has a history of being quite pessimistic about pro-growth policies and its forecasts are not destiny. Good public policy, focused on supply-side reforms, can help turn a negative forecast around. But given the total rejection of the OBR in the last fiscal statement, and the chaos that ensued, its forecasts will be taken as gospel even more so than usual this time round.

Sunak and Hunt will have to treat its growth forecasts seriously. But as they weigh up how to find the money, they will need to consider not just what fills the gaps, but how the spending cuts and tax hikes they implement impact future growth and investment. With rumours circulating that the pair might widen the windfall tax on energy companies, which Sunak brought in during his time in the Treasury, they will have to consider the trade-offs. A short-term tax grab is not obviously the way to make the UK a reliable and desirable country to invest in for the medium-term.