Why Rishi Sunak quit

On Tuesday, the last cabinet meeting with Sajid Javid as health secretary and Rishi Sunak as chancellor passed without any hint that either was about to resign. The ministers did not co-ordinate their resignations, but they had both been tipped over the edge by growing evidence that No. 10 had misled MPs by declaring Boris Johnson had no prior knowledge of Chris Pincher’s behaviour. Sunak had also grown tired of the Prime Minister’s economic ‘cake-ism’ – the fantasy of wanting both high spending and low taxes. The contradictions had become untenable.

In that cabinet meeting, Johnson offered more cake. He was his usual ebullient self, promising a morale-raising speech to move on from recent woes. It was Michael Gove who confronted him. Now is the time for candour, he said, not misleading boosterism. Tackling inflation would be very painful so there’s no sense in pretending otherwise. And didn’t part of the problem rest around the cabinet table? ‘Fiscal Nimbyism,’ he called it. Ministers claim to love low taxes, but when spending cuts are suggested to make a low-tax economy possible, they all say: not in my department.

In Sunak’s resignation letter, in which he noted his ‘fundamentally different’ economic approach to the Prime Minister, he made it clear that he agrees with Gove. ‘Our people know that if something is too good to be true,’ he wrote, ‘then it’s not true.’ The highest spending in decades has been coupled with the highest tax burden in living memory. Sunak could no longer pretend otherwise. 

The prospect and pressure of a joint speech with Johnson is said to have also contributed to Sunak’s decision to resign: he was not interested in delivering feelgood remarks without substance behind them. He never has been. The former chancellor was notably the only minister at party conference last October not using the low-tax rallying cry with the base. He couldn’t bring himself to say it with the tax burden at a 70-year high, and no real prospect on the horizon of bringing it down until Johnson changed his spending tune.

In the hours before Johnson appointed Nadhim Zahawi as his new chancellor, he boasted to Tory MPs that losing Sunak would make tax cuts ‘a bit easier to deliver’. Had Johnson’s premiership survived a few more months, No. 10 would have put pressure on Zahawi to make this happen, while also sticking to Johnson’s big spending promises. It’s difficult, however, to see how this position would have ever been possible when every 1p cut from income tax costs the government £5 billion.

Zahawi used his first – and now possibly only – interview as Chancellor to suggest that he could scrap Sunak’s plan to raise corporation tax from 19 per cent to 25 per cent next year. Yet despite his hints at tax cuts, not much is known about his economic view. As a backbencher he joined the Free Enterprise Group – a caucus of free-market MPs – but has been fairly quiet since. Those close to him say he is attracted to the idea – popular among supporters of Liz Truss – that the government’s Covid debt should be treated like war debt, a one-off paid back over decades, which might extend the government’s fiscal headroom to allow more borrowing for spending boosts and tax cuts.

Sunak believed this approach was hugely dangerous. To borrow your way out of an inflation crisis, at a time when interest rates are soaring, risks deteriorating the public finances further and, in the worst-case scenario, triggering a debt crisis.

Just as Sunak warned well over a year ago, inflation and higher borrowing costs have dramatically hiked the government’s debt servicing bill. The UK is more exposed than other major countries because roughly a quarter of the national debt is linked to inflation. Interest on the national debt was £7.6 billion for the month of May – almost twice what it was last year and the fourth highest monthly amount on record.

And what happens when the gap between spending promises and tax promises becomes so large that borrowing will not be able to cover it? This isn’t just a Covid problem, though the pandemic exacerbated the strain on public finances. Healthcare and pension costs were forecast to become unsustainable long before lockdowns. Spending on the NHS alone is predicted to reach 44 per cent of the government’s day-to-day outgoings in the next three years. Extra debt might stretch over the gap between what’s promised and deliverable for a while, but it can’t last.

Tax cuts would help to ease the pain felt by the cost-of-living crisis, and possibly boost morale (at least temporarily) among the Tory grassroots. But they would not address the fundamental economic problem of growth, which is predicted to be the lowest in the G20 next year apart from Russia.

This government’s decision not to pursue substantial supply-side reform became the biggest limit on what any chancellor could achieve. Some had big ambitions for boosting economic growth and adding to the Treasury’s coffers by creating more – rather than more heavily burdened – taxpayers. But tax cuts will only get results if they are supported with a well-crafted system of reform, designed to liberalise the most bogged-down sectors (mainly housing and healthcare). Tory backbenchers have suggested they will not tolerate such reforms and so the PM, at the mercy of his parliamentary party, also refused to budge.

In the end, Sunak’s Thatcherite tendencies – to look after the deficit – clashed too much with Johnson’s Reaganite feeling that the deficit is big enough to look after itself. Sunak wanted to fund tax cuts with spending cuts. Johnson rejected this trade-off. So the Prime Minister moved onto his third chancellor in less than three years, switching personnel rather than policies. And now the party prepares to switch leaders.