Chancellor of the Exchequer Rishi Sunak’s determination to bring Britain’s public finances under control marks a very different tone from the global consensus for uninhibited crisis spending.

In a prelude to his annual budget on Wednesday, the finance minister gave a series of interviews to warn about future tax increases and spending cuts that will be needed to offset 300 billion pounds ($418 billion) of aid handed out since the coronavirus pandemic struck, even as the U.K. stays frozen in its third national lockdown.

That emphasis on deficit cutting evokes the ruling Conservatives’ controversial stance in the wake of the 2008 financial crisis. It pits Sunak against many economists, a former Bank of England chief and governments from the U.S. to the European Union, all of whom favor avoiding talk of debt consolidation until after the pandemic. It also opens a fault line with the Labour opposition.

“It’s too early to judge by how much taxes will need to go up and spending cut,” former BOE Governor Mervyn King said in an interview on Bloomberg Television on Monday. “The right thing to do now is to keep options open and not to commit ourselves to a precise path for government tax and spending measures.”

Lagging Behind

Britain is further below pre-pandemic output than any other G-7 economy

Source: National statistics agencies

Note: Canada estimate based on Bloomberg survey forecast

Britain suffered both one of the biggest coronavirus outbreaks and the worst economic performance of any major economy last year, with its sharpest contraction in three centuries. Prime Minister Boris Johnson and the BOE expect a rapid program of vaccinations will spur a sharp recovery by the middle of this year.

“We do have a challenge in our public finances, and if we don’t do anything, borrowing will continue to be at very high levels even after we’ve recovered from Covid,” Sunak said on Sunday in a Sky News interview. “That’s not a good situation.”

What Our Economists Say ...

“Shifting his fiscal strategy too early toward consolidation would create an unnecessary headwind for the recovery. For now, Sunak should embrace patience of prudence.

--Dan Hanson, Bloomberg Economics. Click here for the full REACT.

Sunak is expected to extend support to workers and businesses hit hardest, perhaps by prolonging some furlough payments. The Treasury has also confirmed a series of grants to hospitality companies.

The chancellor may propose tax increases and higher thresholds for exemptions to begin next year, according to Christopher Graham, an economist at Standard Chartered Bank. That stress on fiscal consolidation is distinct from counterparts.

U.S. Treasury Secretary Janet Yellen is pushing for a massive fiscal stimulus, while European countries such as France and Germany have pledged to keep aid for the economy as long as it’s needed. Many observers reckon that’s a safer stance at present.

“A discussion on tax hikes would weigh on the recovery,” said Fabrice Montagne, chief U.K. economist at Barclays. “If you talk about tax hikes too soon, people will keep the excess savings they’ve been building up to pay their taxes.”

The U.K. chancellor has spent big during the crisis, but Britain has also differed from elsewhere in using mainly short-term programs, accompanied by commentary that they weren’t sustainable. While that approach gave Sunak flexibility to end support swiftly if the pandemic subsided, it also led to a series of U-turns, sowing uncertainty that cost jobs.

Sunak’s position does reflect concern about just how enormous a deficit Britain has. While borrowing in 2020-21 is set to come in a little below the almost 400 billion pounds forecast by the Office for Budget Responsibility in November, it’s still likely to be the equivalent of more than 17% of gross domestic product -- easily the highest in peacetime.

Economic Headwinds

Fiscal policy is set to become a drag on U.K. growth under existing plans

Source: Resolution Foundation, Office for Budget Responsibility

Moreover, bond markets have plunged in the past few weeks, pushing yields on longer-term U.K. gilts higher than where they were when the pandemic started. That’s provided the Conservative government a reminder that while debt costs are affordable now, financial markets could change that position quickly.

“Rising yields at some point will raise pressure on the Tories to rediscover their fiscal conservatism,” said James Athey, a money manager at Aberdeen Standard Investments.

Sunak’s stance on debt is revisiting a familiar battleground. The Conservatives’ last effort to tighten the public finances under then-Prime Minister David Cameron divided economists on whether austerity delayed a pickup in the economy.

The decision to cut the deficit then knocked 0.75% off GDP by early 2011, extending the path back to full employment by 2 1/2 years, according to Dan Hanson at Bloomberg Economics. He estimates that higher yields over the past month have increased debt servicing costs to 1.2% of GDP from 1%, still very affordable by historic standards.

Sunak’s latest comments build on a sentiment he already shared last year, when he called it his “sacred responsibility” to return the public finances to health and joked about taking away the prime minister’s credit card.

By intensifying his rhetoric on debt, the chancellor has set a clear dividing line with Labour, who accuses him of being “economically illiterate.” The main opposition party has called on him to confirm support for people who have slipped through the government’s social safety net.

“While he dithers and delays, people right across the country lose their jobs,” said Anneliese Dodds, the Labour member of Parliament who speaks on finance. “Coronavirus may have closed large parts of our economy. But this government crashed it.”

— With assistance by Andrew Atkinson, Lucy Meakin, David Goodman, Alex Morales, William Horobin, and Birgit Jennen