Will inflation bring back austerity?

The return of inflation has changed politics, I say in the Times today . Until recently, it was possible to argue that the government should borrow to slashes taxes, or to cover almost any additional spending. It was so cheap to do so that it was almost rude not to, the argument went. Inflation was also dismissed as a dog that hadn’t barked since the early 1990s. Johnson was relaxed, while last September Liz Truss thought that – if necessary – borrowing would be a better way to pay for the government’s social care policy than raising National Insurance.

But debt payments are now expected to quadruple. They will absorb an extra £96 billion between now and 2027, which puts a limit on how much more the government should want to borrow. With the tax burden heading to a 77-year high, the prospect of raising taxes further is hardly appealing. 

The best answer to this problem would be moving the economy out of the low-growth rut that it has been stuck in since the crash. In the 30 years before, productivity grew at an average of 2.2 per cent a year. Since the crash, it has grown at a mere 0.4 per cent. Sunak has set out a series of reviews of business taxation designed to boost investment in skills, research and development and capital in an attempt to solve this problem. But it would be overly optimistic to imagine that once these changes have been introduced, the growth rate will rise straight away.

This leaves only one option: spending restraint. Or, as opposition politicians will seek to label it, austerity — something the prime minister once defined himself against.

Inflation is going to upend politics around the western world. It is the main reason why Joe Biden’s Democrats are likely to lose control of both the House and the Senate in this November’s mid-term elections. The best hope for the Tories is that inflation will pass through the system before the next general election. But getting from here to there will be extremely painful.