UK chancellor Rishi Sunak © FT montage; Reuters

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The bad news is coming: Rishi Sunak’s trademark signature has ominously disappeared from the slick Treasury graphics that associate the chancellor personally with big spending announcements.

Mr Sunak and his allies are preparing for the moment next year when the chancellor will no longer want his name attached to big Treasury decisions of a different kind: hefty tax rises and spending cuts.

Wednesday’s autumn spending review was a tipping point for the chancellor, the pivot between the unavoidable largesse of the Covid-19 health emergency and the painful retrenchment to come.

£394bn Projected UK deficit

“Long term scarring means, in 2025, the economy will be around 3 per cent smaller than expected in the March Budget,” he said. A hard no-deal Brexit would make things even worse, official forecasts confirmed.

The spending review saw the uneasy spectacle of a chancellor still revelling in the writing of big cheques, while simultaneously warning of a £394bn deficit — the highest in Britain’s peacetime history.

Mr Sunak said the statement was “a clear statement of our priorities”: it combined £55bn of emergency spending next year on fighting the coronavirus crisis with the allocation of billions to the Conservatives’ manifesto commitments.

The chancellor put aside more than £4bn to avert the threat of mass unemployment, confirmed a massive infrastructure and housing package for the government’s “levelling up” agenda, and funded green energy and defence.

These were manifesto pledges that Mr Sunak and Boris Johnson, prime minister, have insisted must be honoured in spite of the pandemic; the tricky bit begins in the March Budget when the chancellor has to start paying for it.

Mr Johnson has insisted there will be no return to the public sector “austerity” — he can barely bring himself to use the word — of David Cameron’s coalition government after the 2008 financial crash.

But Mr Sunak tacitly acknowledged in his statement that spending cuts are coming too: tax rises and the eternal hope that “higher than expected growth” will fill the fiscal gap are unlikely to be enough.

The chancellor started with what he believes will be a politically popular cut: taking £4bn out of the overseas aid budget. Tory polling suggests the Archbishop of Canterbury, former prime minister Tony Blair and other critics of the cut do not speak for the majority of voters in target seats.

But the squeeze on public sector pay, a key feature of George Osborne’s fiscal consolidation as chancellor from 2010-2016, suggests that Mr Sunak is willing to borrow the policies of austerity, even if he does not use the word.

“Given no British government has been willing — or able to persuade the public — to take the tax burden higher than 40 per cent of national income, much of the strain is always borne by spending,” Mr Osborne wrote in the London Evening Standard on Tuesday.

Raising taxes will not be easy for Mr Sunak, not least because, in the words of former Treasury minister David Gauke, the political and fiscal cycles are dangerously “misaligned”.

“Politically you would want to get the pain out of way early in the parliament,” Mr Gauke said, noting that normally chancellors would be raising taxes now: Covid-19 has forced Mr Sunak to wait.

“It will be tax increases that have to bear the burden and it’s not clear the Conservative parliamentary party is willing to face up to that.”

A range of tax rises on the wealthy have been suggested, ranging from capital gains tax reform to cutting the pension tax relief available for higher earners, but previous chancellors have struggled to persuade Tory MPs to vote for such measures.

Mel Stride, Conservative chair of the House of Commons Treasury select committee, said Mr Sunak’s willingness to break the Tory manifesto pledge on overseas aid suggested he would now consider reneging on major promises on tax too.

The Tory manifesto in 2019 promised no increase in the rates of national insurance, VAT or income tax. Mr Stride said: “Given that they account for two-thirds of tax, it seems highly likely the chancellor will have to look seriously at them.”

The chancellor last Sunday refused to commit to maintaining the manifesto pledge on the three taxes, but putting up taxes on the majority of the British population will be a lot less popular than giving them money.

Mr Sunak now also has to contend with the conflicting demands of two Conservative parties in one: Tory MPs from northern seats want more public spending while those in southern seats want to keep taxes down.

The chancellor will be dealing with these challenges in 2021 at a time when his initially stratospheric approval ratings have started to fall, his reputation tarnished by an autumn when he repeatedly had to rewrite his “winter economic plan”.

In April, 52 per cent of voters in a YouGov survey thought he was doing a good job with only 9 per cent thinking he was doing a bad job. In the latest version of the poll at the beginning of November: 44 per cent said he was doing a good job and 21 per cent said the opposite. For Mr Sunak, the biggest test lies ahead.

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