Tory MPs warned to toe the line over Budget

Downing Street on Thursday warned Conservative MPs they could face disciplinary action if they vote against measures in chancellor Rishi Sunak’s Budget, as Tory unease grows about possible tax rises.

Boris Johnson’s press secretary, asked whether Budget votes in the House of Commons were considered a confidence issue, replied: “Yes.” Rebels in such votes are normally thrown out of the parliamentary party.

Sunak is expected to announce significant rises in corporation tax in his Budget on March 3 and has been urged by his advisers on tax simplification to make major reforms to capital gains tax.

The chancellor is preparing his first measures next Wednesday to start to repair the public finances after spending about £280bn on emergency support for businesses and households during the coronavirus crisis.

Although the Treasury declined to comment on tax issues, senior Conservatives warned Sunak to be cautious and to avoid undermining any economic recovery with higher taxes.

David Cameron, former Tory prime minister, said Johnson’s government had been right to treat the Covid-19 crisis as “a sort of wartime situation”, adding it would be wrong to try to repair the fiscal damage too soon.

My fear is that, as a populist government, giving money away is always easier than collecting it in.

Defending the austerity measures he introduced as premier from 2010, Cameron told CNN: “Today we do face very different circumstances. So piling, say, tax increases on top of that before you’ve even opened up the economy wouldn’t make any sense at all.”

While many Conservative MPs are resigned to Sunak increasing the 19 per cent rate of corporation tax — they are braced for a rise to 25 per cent — there would be greater resistance to radical reforms to capital gains tax.

Mel Stride, Conservative chair of the Commons Treasury select committee, told a Resolution Foundation think-tank event: “If you were going to align income tax rates to capital gains tax, I think it would be extremely problematic on Conservative backbenches.”

Reforms to capital gains tax would hit people with second homes, as well as owner-directors of small companies who often hold cash within their businesses for use as a pension when they retire.

Sunak is well aware of the political sensitivities but he is seeking revenue-raising measures to plug what he fears is a £40bn annual hole in the public finances caused by the long-term damage of Covid-19 to the economy.

Last year a review of capital gains tax commissioned by Sunak recommended slashing the annual allowance and aligning rates more closely with income tax in a move that could raise billions of pounds for the Treasury.

The Office of Tax Simplification, a statutory body, published a highly anticipated report into capital gains tax that concluded current rules were “counter-intuitive” and created “odd incentives” in several areas.

Sunak’s allies refused to comment on whether the tax would be increased in the Budget.

But Treasury officials have indicated that tax rises in next week’s Budget will only be introduced when the economic recovery is entrenched.

In a sign that Sunak wants to spare “ordinary voters” from the brunt of tax rises, he has no plans to increase fuel duty, even though such a move would help Britain meet its “net zero” carbon goal.

The Treasury had drawn up plans to lift the tax on petrol and diesel cars for the first time in a decade.

But cabinet ministers have reassured MPs there will not be an increase — at least for now — as Mr Sunak concedes that cars are a safer way to travel than public transport during the pandemic. 

Former Conservative chancellor Philip Hammond meanwhile was sceptical about the prime minister’s willingness to take tough tax and spending decisions.

“My fear is that, as a populist government, giving money away is always easier than collecting it in,” he told the BBC.

A Treasury spokesman said: “This Budget will give people the reassurance they need in the immediate term, and the chancellor will be honest with the British people about how we are going to recover beyond this crisis.”