Rishi Sunak under growing pressure to avoid tax rises

Chancellor Rishi Sunak is facing growing Conservative opposition to the use of tax rises to start repairing the UK’s tattered public finances in what is set to become a defining battle for the rest of the parliament.

Sunak has told Tory MPs he wants to make fiscal discipline a key “dividing line” with Labour at the next general election and has promised to use his March 3 Budget to be “open and honest” about what that means.

He is eyeing an increase in corporation tax and a possible freeze in the income tax personal allowance later in the parliament to start closing what he fears will be a long-term hole in the public finances caused by the “scarring effect” of the coronavirus crisis.

A bigger round of tax rises is expected in Sunak’s autumn Budget. The chancellor said last week he wanted to prepare the country in the event it needs to respond “comprehensively and generously” when the next economic shock hits.

But many Conservative MPs oppose tax rises in the short to medium term. David Davis, a former cabinet minister, said: “I would aim to start thinking about balancing the books in three years’ time. The aim now should be to do everything conceivable to help the economic recovery.”

John Redwood, a Thatcherite former minister, said: “No tax rises. I’m all for fiscal discipline but you can only have a chance of fiscal discipline if you rebuild the economy first.”

Sunak’s main focus in his March 3 Budget will be on helping the economy out of what he hopes are the final stages of the Covid-19 pandemic: he is expected to extend the government’s furlough scheme and other business support measures until the summer.

But the chancellor also wants to start showing he is serious about closing a long-term fiscal gap of perhaps £40bn, created by the lasting damage to the economy from coronavirus.

Some tax rises are expected on March 3 but others could be foreshadowed in public consultation exercises ahead of a second Budget earmarked for November, by which point Sunak hopes the economy will be in full recovery mode.

Beyond corporation tax increases, Treasury officials have several ideas for revenue raising measures for Sunak to implement if he chooses, including an overhaul of capital gains tax and changes to pension tax relief for high earners.

But like Republican lawmakers in the US, many Tory MPs are no longer signed up to the traditional fiscal conservatism promoted by the UK Treasury. Putting up taxes in an era of cheap borrowing does not make sense to many of them.

One senior Conservative MP said: “I think very few would raise taxes at this point. There is strong support for the ‘war bond’ type approach of parking the lockdown debt for the long term.”

Sunak is said by colleagues to be working closely with Boris Johnson on the March 3 Budget, but the grands projets-loving prime minister is not a noted enthusiast for fiscal restraint or higher taxes. Tensions between the two on the issue are likely to rise later in the year.

Johnson opposes public spending “austerity”, and also insists the Tories stick to their 2019 election manifesto pledge not to put up the rates of income tax, value added tax or national insurance: the three biggest tax levers at the chancellor’s disposal.

Sunak, by contrast, does not think it is politically wise to wait until the eve of the next election — due by 2024 — to put up taxes. “You can’t just pop up in three years’ time and say that’s the time to start balancing the books,” said one colleague of the chancellor.

Moreover, government polling suggests that voters accept there will need to be some kind of payback after the pandemic-induced spending splurge — the annual deficit this year is expected to top £400bn.

Sunak is also less sanguine than some in government about the prospect of interest rates remaining at rock bottom into the distant future.

Most forecasters, including the Bank of England, believe the UK economy will be persistently damaged following the pandemic because of a lack of business investment over the past year, a wave of company insolvencies reflecting how some will not be viable after the crisis, and consumers wanting to be more cautious in the future.

In its most recent forecast this month, the BoE calculated the long-term scars to the economy at 1.75 per cent of national income. Forecasters’ estimates put the fiscal hole created at between £40bn and £60bn.

One Treasury official said: “For me the March 3 Budget is all about what it tells us about fiscal conservatism and whether it has a future.”

One cabinet minister insisted the idea was not dead, but would just have to be “steadily re-embraced over the longer term”.