Prime Minister brought in four top economists to help persuade the Chancellor of spending splurge to ease the cost of living crisis
Source - Daily Telegraph - 27/05/22
Ever since Rishi Sunak delivered his underwhelming Spring Statement in March, Boris Johnson has been searching for a way to make the Chancellor reopen his wallet.
On Monday, he finally found it - when a brains trust of leading economists privately backed a fresh spending splurge to ease the cost of living crisis.
Crucially, they argued against the Treasury’s view that any increase in public spending would increase inflation, giving the Prime Minister the covering fire he needed to take Mr Sunak over the top with him.
By Tuesday afternoon, when Mr Johnson sat down with Mr Sunak to thrash out the details of the spending package, the Chancellor needed little convincing. Ofgem had given them advance warning of an announcement that the energy price cap was likely to rocket by a further £830 in the autumn.
“Once that news came through, it was fairly clear what the solution had to be,” conceded a Treasury insider.
The decision to give households up to £1,200 each meant that the Prime Minister had, ultimately, been able to impose his will on a Chancellor whose ambition to reduce debt often put him at odds with his boss.
Monday’s meeting around the Downing Street Cabinet table brought together Lord King, the former Bank of England governor, Baroness Shafik, the London School of Economics director, Rupert Harrison, George Osborne’s former chief of staff, and Gerard Lyons, Mr Johnson’s economic adviser when he was mayor of London.
Together with Mr Johnson, they were joined by Steve Barclay, the Prime Minister's chief of staff, and several Treasury officials including Douglas MacNeil, a special adviser to the Chancellor.
One source said the Prime Minister "wanted a range of views from outside" the Government, coming from "four different people with four different viewpoints".
The ultimate aim, however, was to provide ballast for the Prime Minister’s theory that a sizeable handout could be given to households, without pushing inflation even higher.
The Treasury officials were adamant that “any relaxation of fiscal policy would be both inflationary and add to debt servicing costs", according to a source with knowledge of the meeting. “We can’t be adding to the debt burden every five minutes,” argued another.
The Treasury’s nerves were understandable. The Prime Minister’s plan was based on a belief - backed by an Office for Budget Responsibility (OBR) forecast - that inflation will rapidly fall after peaking at around 10 per cent at the end of this year, returning to around two per cent by the end of 2023. But the OBR’s recent forecasts have been wildly inaccurate. Only a year ago, it failed to foresee any increase in inflation above two per cent.
Some of the economists pushed back "aggressively" on the Treasury’s view. One source said: "The economists generally agreed there was a growth problem and a cost of living problem and the Government should do something to protect the poorest and most vulnerable.”
A second source added: "There was agreement about the targeted help." Some of the economists pushed for a large fiscal intervention.
"The meeting gave the PM a lot of ammunition for his meeting with the Chancellor,” said the insider. "It was about not just where the money was going, but how big the size should be. It was about the whole stance of the policy.”
After the Spring Statement, Mr Johnson told allies that he had wanted to use the opportunity to guarantee cheaper energy bills for millions of households this winter, but had failed to get the plan past the Chancellor.
Neither man was enthusiastic about the idea of a windfall tax on energy companies, which they regarded as anti-Conservative. Mr Sunak in particular was against the idea of borrowing yet more money - £16 billion more as it turned out - to finance most of the proposed £21 billion giveaway.
But when Shell boasted of its “momentous” £12 billion profits and BP posted its highest annual profit in eight years, public enthusiasm for a windfall tax grew and the political arguments against it weakened.
The Prime Minister and Simon Clarke, the Chief Secretary to the Treasury, summoned representatives of the energy sector to meetings “to provide an opportunity for more ambitious action from them”, a source said. However, they appear to have been unconvinced by what they heard.
Then on May 3, Bernard Looney, the chief executive of BP, undermined the main argument against a windfall tax by saying a levy would not affect the firm’s plans to spend £18 billion on North Sea oil and gas, wind farms, carbon capture and car charging points over the next eight years.
One senior government source said: “When you are the only person left on the field saying no, including people from the energy sector, it’s difficult to keep opposing it.”
Sources close to the Chancellor said he had never regarded windfall taxes as a “silver bullet” to solve a problem, but nor was he ideologically opposed to the idea. They pointed out that Margaret Thatcher and David Cameron had both used windfall taxes in times of crisis.
The first signs that the Chancellor was for turning came in an interview with the Mumsnet website on April 27.
Under relentless pressure to do more, Mr Sunak said he would “look again” at a windfall tax and that “nothing is ever off the table”.
Last week, Mr Sunak met almost 100 Tory MPs through a series of “round table” discussions to test the mood of the backbenches. There were some dissenting voices, but government sources said the majority of Tory MPs were “happy, because it provides an answer to what we’re doing about the cost of living, and they know it is popular with the public”.
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