When you are 20 or so points behind in the opinion polls calling an election before you need to do so is a high-risk strategy. Yet Rishi Sunak has decided that holding on until the autumn is an even bigger gamble. The economy decides elections, and as far as the prime minister is concerned, this could be as good as it gets.
Sunak has only come to this view recently. After sliding into a shallow recession at the end of 2023, the economy has only just returned to growth. Living standards – which took a hammering during the cost of living crisis – have been picking up. Inflation has fallen from a high of 11.1% in October 2022 to 2.3%, only just above its target.
But the economy has only just turned the corner and there was a strong case for playing it long so that the government could point to further evidence of recovery. The chancellor, Jeremy Hunt, certainly thought as much, and the Treasury was already working on plans for a pre-election autumn statement. Plan A was for the chancellor to announce a cut in national insurance contribution (NICs) in September, allowing Sunak to announce the date of a November election at the Conservative party conference.
That plan has now been junked. Plan B involves convincing voters that a fledgling recovery is for real and that Britain’s “hard-won stability” (a phrase Sunak will use repeatedly during the election campaign) will be jeopardised by a Labour victory. So what’s changed?
First, some of the recent news has been better than expected. Growth in the first three months of 2024 was 0.6% and surveys have suggested improvement will continue into the second quarter. Both business and consumer confidence have picked up. In its annual assessment of the state of the economy, the International Monetary Fund said a deep recession had been avoided and a soft landing was in prospect.
Second, the latest annual inflation figures – while showing a sharp fall from 3.2% in March to 2.3% in April – were not as good as the Bank of England and the financial markets were expecting. Headline inflation is expected to remain close to the government’s 2% target for the next few months but is likely to start rising gently in the autumn. Service sector inflation, which is closely monitored by the Bank as a proxy for price pressures generated by the domestic economy, is proving harder to shift, and is running at 5.9%.
As a result, the Bank is likely to be cautious about cutting interest rates. A speech this week by Ben Broadbent, one of its deputy governors, was seen as pointing to a cut in the cost of borrowing in June, but the release of the inflation figures altered the mood. The City now sees little chance of a rate cut next month and thinks there is only a 50% chance of one at the following meeting of the Bank’s monetary policy committee in early August. That will have a knock-on effect on mortgage rates, hurting those whose fixed-rate mortgages expire this year. The longer Sunak delays the election, the more households will be affected.
Third, the state of the public finances means there is no real room for tax cuts this autumn. Although the IMF had some good news for the government, it also said there was no scope for giveaways and indeed pointed to a looming £30bn hole that needed to be filled.
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The IMF’s warning was given added weight by the latest Office for National Statistics figures showing the government borrowed more than £20bn in April – more than in April last year and more than the independent Office for Budget Responsibility predicted at the time of the March budget.
To sum up, hopes of households benefiting from multiple pre-election cuts in mortgage rates have faded. Hunt has been forced to recognise that there is no money for tax cuts. The economy, by recent standards, has been doing tolerably well. So why wait?
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