Rishi Sunak’s un-Tory Budget confounds assumptions once again

The writer, a former head of the Downing Street policy unit, is a Harvard senior fellow

For a government considered very rightwing, this week’s Budget was an astonishing reversal of a decade of Conservative party policy. The hike in corporation tax erased what had been one of chancellor George Osborne’s signature moves. The four-year freeze in income tax thresholds will sweep many unsuspecting families into new tax bands. Once again, Boris Johnson’s government has confounded assumptions about Conservatism, and left the opposition on the back foot.

Chancellor Rishi Sunak had a narrow window in which to keep backbench Tory MPs and voters onside. He would probably have preferred to raise VAT, rather than risk sending a message that post-Brexit Britain may hammer enterprise, with the first increase in the main rate of corporation tax since 1974. But he was hemmed in by manifesto commitments. If the central growth forecasts from the Office for Budget Responsibility prove to be anywhere near correct, the revenues raised could cover day-to-day spending by the middle of this decade. But that is a very big “if”.

This was, in effect, a wartime budget. In normal times, politicians of all parties are highly sensitive to concerns about tax rises. The two world wars led to large public spending increases and left postwar spending levels higher than their prewar equivalents. Sunak’s Budget leaves the overall tax take heading for its highest share of gross domestic product since the 1960s.

How un-Tory. Or is it? It is said that Conservatives endure in office because they are pragmatic rather than ideological, adapting to suit the times. When it comes to fiscal policy, leaders may proclaim versions of George HW Bush’s “read my lips, no new taxes”, but don’t always follow through. Margaret Thatcher’s first Budget is remembered for cutting the top rate of income tax from 83 per cent to 60 per cent. But less so for the simultaneous VAT rise by 7 per cent, which helped to balance the public finances. 

Ronald Reagan obscured the tax rises which followed his far-reaching cuts of 1981 by dubbing them “revenue enhancements”. Having made “no new taxes” the centrepiece of his 1988 presidential campaign, George HW Bush was subsequently forced by Congress to sign some tax rises into law — a move which may have cost him the 1992 election. 

In the aftermath of the Budget, a defiant Sunak has broken with orthodoxy by asserting that “the past several years” of corporation tax cuts have not significantly boosted capital investment. What role Brexit may have played in that, he did not mention.

Sunak is comfortable with the idea that Britain will still offer the lowest corporate tax rate in the G7 group of leading industrialised countries, given the changes that are planned by the US and other governments. But Osborne had wanted Britain to have the lowest rate of corporation tax in the G20.

Sunak and his party still agree that only the private sector can spur the growth that is essential to reducing the deficit. But they seem less sure than previous governments about the links between faster economic growth and a smaller state.

It is not yet clear how businesses will balance the lure of the Budget’s 130 per cent “super deduction” on investment now, versus the planned hit to profits in two years’ time when the new corporation tax rates take effect. Chief executives are likely to register the big signals on tax more than changes to fiddly allowances. Brexit has made it even more necessary to assert, as Thatcher did, that Britain is “open for business”. A long-term plan for growth is needed urgently.

Conservatives generally prefer to impose levies on consumption, rather than on labour or capital. That is why VAT, broad-based and easy to collect, has been raised by almost every Conservative government since its introduction. Sunak’s decision to hit profits instead is a risk, with little indication of how he intends to improve business investment over the medium-term.

While VAT is fair game, Tories have an ingrained dislike of fuel duty. It is simply bizarre that a government with one of the world’s most ambitious targets for carbon neutrality has frozen fuel duty for the 11th year in a row. Johnson’s government is hosting the UN climate summit in November and hopes to use that event to build bridges with the White House under President Joe Biden. That goal should take precedence over business transport costs, which could be alleviated in other ways.

Given the backdrop, the paucity of green policy in the Budget was almost as surprising as the scale of fiscal intervention. A new remit for the monetary policy committee to support net zero is potentially powerful; and there is nothing necessarily wrong with the new infrastructure bank having climate action and economic growth as twin investment priorities. But more will be needed to mobilise private capital on the scale required. 

There is no doubt that the political axis has shifted. It is impossible not to feel some sympathy for the Labour opposition. When Sir Keir Starmer said in his response to the Budget that “we know he’s itching to get back to his free market principles”, the words seemed wishful. Sunak is a free marketeer at heart, but the electorate which voted in his boss were backing a high spending, boosterish prime minister.

Johnson is a lucky politician in the success of the vaccine rollout. This Budget has already brought him a poll boost. But he and his chancellor urgently need a long-term vision as they walk the tightrope to economic recovery.