The contours of the next election have been set

Since the 2008 financial crash, British politics has been moving faster and faster, and becoming less stable. This frenzy reached its apogee with Liz Truss’s 44-day stint in No. 10 which had enough drama for a ten-year premiership.

One of the challenges for Rishi Sunak is to calm things down and to return politics to a more normal pace. It will be a good sign for the government if the World Cup dominates newspaper front pages for the next month.

However, there is one area where Sunak needs politics to move faster than normal. Jeremy Hunt’s Autumn Statement is the kind of fiscal event that you would expect at the beginning of a parliament. It is about dealing with a difficult fiscal inheritance. It is designed to fix the ‘mistakes’ of the previous administration. It emphasises that tough decisions taken now will bring future benefits. Yet Hunt and Sunak have only two years for their approach to bear fruit.

We already know the tests by which the government expects the Autumn Statement to be judged. First, will it satisfy the markets? What ultimately doomed the Truss-Kwarteng mini-Budget was the market reaction. The spike in borrowing costs forced Truss to abandon nearly all her plans before they had even been implemented.

Second, will it be seen as ‘fair’? Even if the Truss-Kwarteng approach had not spooked the markets, it still would have been a hard sell. Voters would have questioned whether the abolition of the 45p tax rate for those earning more than £150,000 should be a priority, especially when the 40p rate kicks in at just £50,000. The government also seemed to be moving away from the idea of raising benefits in line with inflation. It was hard to explain the justification for cutting taxes for the richest while contemplating cutting benefits in real terms.

At the time of writing, it’s hard to know how the markets will respond to the Autumn Statement. The government, however, has tried to present it in very different terms to September’s mini-Budget. Then, the offer of an Office for Budget Responsibility forecast was rejected, there were tensions between the government and the Bank of England, and the Treasury permanent secretary had just been sacked. This time, there’s an OBR forecast, relations between the Bank and the government are on a sounder footing, and ministers are talking the language of fiscal conservatism.

In his first intervention since he was sacked by Truss, Kwasi Kwarteng argued that the mini-Budget could not be blamed for the current problems as gilt yields have returned to where they were before. He is right that it was never the sole cause of the problem. Across the world, the era of cheap money is coming to an end, and one of the reasons why the fiscal choices facing the country are so unappealing is the slow rate of UK growth since the financial crash. But what is also true is that the fallout from the mini-Budget means that the markets expect more specificity from the government than they might otherwise have done.

If the market reaction will be fairly easy to measure, then the fairness test is inherently more subjective. The government will make the argument that the wealthiest are paying the most in extra tax. It will also claim that the measures it is taking are ‘compassionate’ because pensioners and others on benefits are being protected.

The Autumn Statement will define the rest of this parliament and set the contours for the next election. So how will Labour react? There are two ways for an opposition to respond. One is to accept the overall approach but tinker a bit here and there. For instance, Labour might accept the broad outlines of the Tory settlement but tax an unpopular group more to spend more on something popular, such as the NHS. This is the safest approach to take; it is what Labour did in 1997.

The other option is to do what Labour did in 1992 and present its own shadow Budget. That would provide more flexibility and avoid the situation Labour found itself in during the late 1990s when it was sticking to Tory spending plans that Ken Clarke himself said he wasn’t planning to implement. But because the government sets the baseline, it is hard for the opposition to suggest different plans for public spending without being accused of cuts or tax rises. In 1992, the Tories hit Labour hard on tax.

Keir Starmer is clearly aware of the risk. It is striking how much of the mini-Budget Labour accepted before it was abandoned. They were, for example, in favour of Kwarteng’s 2023 cut in the basic rate of income tax before it was dropped: they didn’t want the Tories to be able to claim that Labour wanted to raise income tax. On other measures, they took the money and used it elsewhere – for example, they were going to spend what Truss and Kwarteng were putting towards the abolition of the 45p rate on more district nurses and health visitors and extra medical training places.

Interestingly, just ahead of the Autumn Statement, the shadow health secretary Wes Streeting said that Labour would reform non-dom status and use the money to fund the training of more doctors. This suggests Labour is leaning towards the 1997 course, not the 1992 one.

One lasting consequence of the mini-Budget is that promising to fund either public spending or tax cuts through borrowing is now much more politically difficult than it was. Any party which goes down those routes risks being accused of repeating Truss’s errors. The fiscal parameters of British politics have been narrowed. The question is whether Labour wants to narrow them still further.