Chancellor Rishi Sunak’s Budget confirmed the sea change in British politics, apparent since the general election of 2017, that the era of austerity has drawn to a close.

Ever since Boris Johnson became prime minister back in summer 2019, this has been a Conservative administration committed to consistent spending increases. The 3% average annual spending increases over the next three years, totalling £150bn, are lower than the 4% average increases under New Labour, before the financial crisis hit. And they are nothing like enough to repair the damage done by ten years of Tory austerity, as the Institute for Fiscal Studies shows on the graph below.

Nonetheless, the increases are real. Alongside Sunak’s longer-term ‘fiscal rules’, they show that the new consensus in British economic policy looks strikingly close to Labour’s economic programme of 2017. Labour’s ‘Fiscal Credibility Rule (FCR)’ then offered a rolling target for day-to-day spending to match taxes inside of five years. It allowed borrowing for capital investment – spending on things like new railways, or research. It had a target for debt to GDP to fall at the end of Parliament. And it had a knock-out rule so that, in a deep recession, the whole FCR would be suspended to allow the government to spend as much as was needed to stabilise the economy.

Sunak’s new fiscal rules allow borrowing for capital spending. They have a target for debt to GDP to fall at the end of Parliament. They have a knock-out rule so that, in a deep recession, the entire fiscal framework could be suspended to allow the government to spend as much as required to stabilise the economy. And they have a rolling target for day-to-day spending to match taxes inside of three years.

Sunak said he wanted a “high-wage, high-skill, high-productivity, economy” – a strikingly similar formulation to that regularly offered by Labour’s John McDonnell, who spoke of a “high-wage, high-investment” economy. Sunak offers significant increases in investment for decarbonisation and for scientific research. The overall tax burden has been raised to its highest level since the late 1940s – about the same level, overall, as Labour’s 2017 tax plans implied.

It was striking, however, that so many were blindsided by some of Sunak’s Thatcherite rhetoric before the Budget. But his little homilies about wanting low taxes and the joys of a small state, made at Tory party conference and then tacked on to the end of yesterday’s big spending announcements are just that – Sunday sermons, offered for the benefit of the party faithful. What matters is what he does, and Sunak is a big-state Tory chancellor. ‘Lord, make me fiscally conservative, but not yet,’ is his real attitude, channelling St Augustine.

This should have been expected. Disputes inside the Conservative government had blown up prior to the Spending Review, in an unusually public fashion. The business secretary, Kwasi Kwarteng, was publicly rebuked by the Treasury earlier this month for claiming he was in discussions with them about support for energy-intensive businesses. The Treasury itself was then slapped down by the prime minister’s spokesperson.

It’s an intra-Tory row, the sort of tittle-tattle that fills the Sunday papers and occupies Westminster journalists’ attention. But the outcome told you far more about where this government was going. Whatever the Treasury’s intentions – and, like those of Sunak himself, the Treasury’s own internal bias is towards so-called ‘balanced budgets’, even if it means spending cuts – this is the prime minister’s government. And Johnson wants spending.

It should also have been possible to see how those tensions would be eased, thanks to some eagle-eyed reporting by Chris Giles of the Financial Times, who noted that the official forecasts from the Office for Budget Responsibility were likely to be far more optimistic than earlier in the year. This had the effect on the day of handing Sunak a £30-40bn windfall, which he happily used to increase spending. Of course, he didn’t have to: an old-school Tory might have used the bonus to (foolishly) try to shrink the government debt faster, or cut taxes – and clearly, at some point before the election, Sunak wants to cut taxes. But just not yet.

Even before the pandemic, the Conservatives had already increased spending. It rose 4.1% in 2019, with Sajid Javid as chancellor, ahead of COVID erupting in Britain in early 2020.

The balance of forces inside the Tory party is running against spending cuts. With all those newly elected Tory MPs holding slender majorities in former Labour areas, who had been promised an end to austerity by Johnson, the pure electoral calculation leans towards more spending. The dislocation that Brexit is causing – and will continue to cause – is made easier to deal with hefty levels of government spending, and economic intervention more generally. It’s not especially easy to extricate a country from 40 years’ worth of trade and economic treaties with its closest trading partners. The blow can be softened by public funds.

More speculatively, the political hit that British financial services in general have taken from Brexit has undermined their own capacity to act as a loud voice for ‘sound money’ inside government. This is even before considering the immediate impact of the pandemic and the exceptional levels of funding needed to cope with the backwash from 2020-21.

Labour’s response

Surveying all this, a certain kind of political commentator has leapt to the opposite conclusion, declaring Sunak to be offering a ‘Labour Budget’ and, in the weary cliché, parking his tanks on Labour’s lawn.

On one level, the new consensus is a challenge for Labour. Under Jeremy Corbyn, the party switched from a mealy-mouthed ‘too far, too fast’ argument against Tory spending cuts to an outright anti-austerity position. As the cuts became increasingly unpopular, digging deeper and deeper into the fabric of British social life, this argument started to take hold. Labour’s relative success in 2017 – somewhat shockingly, the only election since 1997 where the party actually gained seats – reinforced the point. But having won the argument, without having won the election, the Tories’ shameless flip into increasing spending presents a political challenge. How, then, to update a tried-and-tested anti-Tory position?

There is some evidence that Labour’s frontbench is getting there. Shadow chancellor Rachel Reeves’ response to Sunak, delivered immediately after his presentation with precious little time to prepare, was notably effective, visibly and audibly rattling the Tory benches opposite. She zeroed in on the two major flaws in his argument: first, that spending now by the Tories was not sufficient to repair the damage of austerity; second, and more importantly, that the pattern of tax cuts and benefits changes they had introduced reflected their pure class interests.

Sunak had slashed the taxes paid by UK-based banks, but at the same time significantly increased the taxes to be paid by most people in work, in the form of a National Insurance Contributions increase. He had previously cut £20 a week from Universal Credit, with the slight increase in the system’s generosity at Budget doing too little to compensate for it. The Resolution Foundation estimates that an average household could be looking at a £3,000 tax increase from Budget measures. For all the talk, from the prime minister downwards, of wanting a ‘high-wage’ economy, the reality in the immediate future – and, most likely, stretching well into following years – is of rising prices putting real pressure on most people’s living standards. Far from ‘high wages’, many of us face wages that look increasingly paltry next to skyrocketing prices for gas, electricity, and food. Coupled with tax rises the squeeze is going to be only too real.

And this is Sunak’s real hostage to fortune. The OBR’s forecasts may now look relatively rosy, and its estimate for the long-run damage from COVID less severe. But the OBR is an institution heavily predisposed to optimism bias, as the record of its first decade shows:

But even allowing for its (frankly, unrealistically low) expectations for the long-run impact of COVID, the OBR’s own forecasts imply a major squeeze on household incomes for a long period of time. Unless some productivity miracle happens, household budgets – even in the OBR’s comparatively optimistic forecasts – are going to be hammered.

It’s at this point that Labour and the Left can intervene. There is a rock-solid argument for shifting the balance of the tax system away from those who work, and onto those who merely own wealth. Reeves has hinted Labour wants to do this, without yet specifying how. And for the wider Left, the first glimmers of an uptick in union organisation are becoming apparent. COVID has produced tight labour markets, and workers in those markets are starting to respond. This has, in Britain, so far been mostly on the level of winning individual pay rises. But if unions, and especially with their new leadership at Unite, can seize the moment and start to organise we might well start to see serious, inflation-beating pay rises across the economy. This isn’t how Rishi Sunak and Boris Johnson think they’ll build a ‘high wage’ economy. But it’s how it can be built.