“Obviously, in the run-up to an election, I would love to do a tax cut that ordinary people felt.” So said Jeremy Hunt earlier this week, at a Centre for Policy Studies event on the fringe of party conference. In doing so, he was echoing the sentiments of quite a few of his parliamentary colleagues, and those CCHQ strategists hoping to have more to work with next year than banning fags and scrapping A-Levels.
The obvious difference between Hunt and the average Tory moaning that the tax burden has reached the highest since the Second World War is that he is the Chancellor of the Exchequer, and thus better placed than you or I to do something about it. If he does not, the Institute for Fiscal Studies calculates total tax revenues will have gone from 33 per cent of GDP in 2019 to 37 per cent next year – a larger rise in this Parliament than in any five years since VJ Day.
That’s £3,500 per household. Frozen income tax thresholds – announced in 2021 but extended to 2028 – will drag around two million people into the 40p and 45p tax brackets over the next five years. Coming amid the obvious pressures on the cost of living caused by inflation, and despite recent good news about our comparative international performance, it is no surprising we are all feeling poorer. Well, except for Boris Johnson.
Concern that Britain is becoming a country of permanently higher taxes is not new. The central dividing line between Liz Truss and Rishi Sunak last summer was over their approach to taxation. Both said they wanted taxes to be lower, but only Truss had the confidence to cut taxes now and hope to be vindicated by higher growth.
That approach went so well that Rishi Sunak has been Prime Minister for almost a year, that almost all her cuts have been reversed, and that a moratorium exists within government on talk about further cuts, such has been the need to keep the markets sweet. Until now. I’ve covered the pros and cons of a potential move to abolish Inheritance Tax. Yet before taxes can even be cut, one must stop the burden rising even more.
If Sunak and his Chancellor are unwilling to shift from their Augustinian approach to cuts, some MPs have taken it upon themselves to put some lead in their respective pencils. By complete chance, quite a few of them MPs opposed Sunak in last summer’s leadership election and found themselves on the backenches after he entered Downing Street. I’m shocked! Shocked I tell you!
Jake Berry, Liz Truss, Jacob Rees-Mogg, Priti Patel, Brandon Lewis – all are among the 33 or so Conservatives to have signed a pledge vowing not to “vote for or support any new taxes that increase the overall tax burden”. Berry – a former party chairman, but that’s not an exclusive group nowadays – said we “cannot tax the economy back to health”. Truss said the “unprecedently high tax burden is one of the reasons our economy is stagnating”. Cue the Sonny and Cher, and grab Punxsutawney Phil.
The rhetoric is a depressing reminder of last year. But Berry, Truss, and their motley collection of pledge-signers matter. They have more than enough MPs to prevent the Autumn Statement from passing. If they mean what they say, Hunt could be looking at a very significant headache if he is wants to squeeze another hike past MPs.
Or is he? There is an obvious element of calling the Chancellor’s bluff in the plan. Hunt has made clear that he doesn’t want to raise taxes further. The pledge-signers thus could do something similar to the Chancellor’s own sleight of hand over falling inflation: look at what looks likely to happen, and then claim credit for it if it does. Everyone gets to feel very smug.
Unfortunately for the MPs involved, however, there is a potential spanner in the works. Hunt may not be looking for tax rises. But tax rises might be looking for him.
Contrary to what a few MPs may occasionally confuse themselves into thinking, the tax burden is not at a record high out of a positive choice by Sunak and Hunt. They are not Corbynista sleeper agents; the scions of Winchester and Charterhouse are not tacitly planning class warfare.
Taxes are high, in the immediate term, because of the spike in borrowing costs. The cost of servicing our debt quadrupled last year as yields on government bonds soared. The national debt has reached £2.5 trillion, and servicing that costs £110 billion a year – more than a tenth of public spending, and more than anything else but the NHS and welfare. Hence why Hunt said, at the same event as mentioned above, that “talking about tax cuts this autumn is slightly academic”.
Indeed, pressures on the public finances might be pushing towards tax increases, rather than cuts. As interest rates have risen, so too has the cost of servicing our liabilities, especially as a higher-than-average share of UK debt is index-linked. Unfortunately, UK 30-year bond yields reached their highest level since 1998 on Wednesday, as investors increasingly agree that high inflation will mean central banks keeping interest rates higher for longer.
If the situation deteriorates – watch Allister Heath cheerily warning of “a new financial crisis” as high rates crunch balance sheets across the world – then further tax rises may become unavoidable. That’s leaving beside the general trend towards higher taxes encouraged by an aging and more demanding population, anemic growth, and a system of government procurement and delivery that remains a dumpster fire.
If taxes do have to rise then Berry, Truss, and co will face an obvious choice: do the remarkable and vote down their own Chancellor’s finance bill, or quietly climb down in the face of market pressure. The latter may seem tragically familiar; the former would be the fiscal equivalent of Peter Cruddas calling for Tory donors to give up on their own party.
Of course, as Ryan Bourne has pointed out, and as we at ConservativeHome have mentioned once or twice, there is another way by which tax cuts could be financed: reducing government spending. Not by tinkering with benefits rules or yet another crackdown on civil service staffing, but genuine public sector reform with a real interest in efficiency and cutting waste. More profoundly, an effort to rebalance the relationship between the state and society: to reduce the demand for government.
But it was a refusal to cut public spending that scuppered the Trussites last year. Why on Earth would they have changed their minds now? Better to sign headline-grabbing pledges whilst auditioning to replace the latest GB News presenter to get their P45, than genuinely engage with the serious business of managing the public finances.