Imagine the future exam question. “At what point, in 2023, did Rishi Sunak and Jeremy Hunt officially declare they had given up on the Red Wall?” That assumes that some future Politics student would be sadomasochistic enough to choose to study this oft-dispiriting period of modern British history.
But in the presumption that some poor undergraduate from 2047 has stumbled across this piece whilst struggling to answer that question, they might find that Wednesday’s Autumn Statement would be a good place. If the Chancellor announces to the Commons cuts to Inheritance (IHT) rather than Income Tax, he will be reading the last rites of the realignment that delivered the 2019 majority.
We know that tax cuts are coming. After months of insisting that reducing inflation was his priority, that he lacked the fiscal headroom to make any sort of reduction, and that cuts to levies on businesses should be the priority, Hunt has made abundantly clear yesterday that he believes that the priority is “growth”, and that tax cuts smooth the path to that.
Why? After a year of repudiating Trussonomics, has Hunt been converted by a few je ne regrette rien op-eds from Patrick Minford and the work of the ex-premier’s Growth Commission? Not quite. Sunak my have achieved his task of halving inflation, but the economy has stalled. With no expansion estimated between July and September, and Threadneedle Street predicting a recession, another pledge is looking shaky.
This has been coupled with better-than-expected figures for the Prime Minister and Chancellor from the Office of Budget Responsibility. At the time of the March Budget, Hunt believed he only £6.5 billion of fiscal headroom to play with. Thanks to inflation, fiscal drag, and healthy tax receipts, he now has around £25 billion, if reports are to be believed.
The public finances are still suffering from long Covid, with levels of taxation and debt at their highest in decades. Sunak’s and Hunt’s presence in office relies solely on the impression that they are a tad more fiscally responsible. Both – the Prime Minister especially – are instinctive fiscal conservatives. Talk of tax cuts has thus been omerta in Number 10 since Sunak entered, with even his previous pursuit of a penny cut to income tax off the table.
But with the Rwanda scheme in tatters and the polls stagnant, the pair are conscious of their need to give their fellow Conservatives something to encourage any lingering confidence in re-election. This means chucking a bone to those Trussite long marchers on the backbenchers to prove the reality of their insistence that they dislike presiding over a high-tax, low-growth Britain.
A new question thus hoves into view for the Chancellor: which taxes to cut? Where Hunt chooses to wield his axe says much about who the Government is most keen on appeasing and appealing to. Following a damp party conference, empty King’s Speech, and controversial reshuffle, this is one of Downing Street’s few remaining opportunities to bat an eyelid at a hostile electorate.
This returns us to the IHT vs Income Tax dichotomy. Simply put, choosing the former over the latter, especially after briefing out that cuts are being considered, would be an admission that CCHQ’s focus is not on keeping onside marginals across the North and Midlands, but on shoring up the core Tory vote. The Blue Wall triumphs over the Red.
IHT is charged at 40 per cent on estates of more than £325,000, with an extra £175,000 allowance towards a main residence passed to a child or grandchild. Married couples can pool their allowances. The suggestion is that Hunt is aiming to reduce that rate to 20 per cent now or in the spring, whilst laying out a pathway to its ultimate abolition.
Currently, IHT is only charged on around 4 per cent of estates. In 2020-21, it was charged on 4, 800 estates in London and 5, 650 in the South East of England. This represented 55 per cent of the total liability for England, and 45 per cent of that of UK as a whole. Transfers of wealth were lower across the North and Midlands, due to lower house prices.
Perhaps we can see this as a happy side effect of levelling-up’s failure to be anything more than a vague aspiration to reverse decades of regional inequality through a few judiciously placed hanging baskets. Nonetheless, it makes clear how Labour will spin any IHT cut: amidst a cost-of-living crisis, Sunak and Hunt chose to look after their fellow millionaires rather than the hard-pressed majority.
In fairness, polls do repeatedly show IHT being one of the country’s most unpopular levies. Almost certainly, more voters think they will have to pay it than actually do. Abolishing it would be less expensive than cuts to Income Tax or National Insurance, at only £7 billion a year. The Daily Telegraph would approve, not something the Government can always say about its agenda.
Yet by prioritising abolishing IHT over enabling voters to keep more of their current pay packets, Hunt would be showing that any talk that “growth” is his focus is ultimately hollow. This is a blatant bribe to the Tory base. That it is being considered suggests Downing Street does not consider a Canada 1993 scenario impossible, and is conscious of a need to keep the shires onside.
When backbenchers from the North and Midlands realise that CCHQ is tacitly writing off their chances of re-election in a desperate rush to prevent the party’s total collapse, one imagines their response will be less-than-stellar. Even for those MPs supportive of the move, Downing Street will confront the natural problem of paying the Danegeld. Backbenchers will bank the IHT cut – and come back demanding more in the Spring.
As I have highlighted previously, a more pro-growth option for the Chancellor would be to abolish stamp duty. Sunak’s pandemic-era holiday both boosted sales by 53 per cent, and raised greater revenues, since it was left in place for properties valued at over £500,000. Endless studies – such as by our friends at the Centre for Policy Studies – have highlighted its distortive effect on our already hobbled housing market.
Abolishing stamp duty entirely would cost around £10 billion, but previous research has suggested a partial abolition could be much cheaper, or even revenue neutral. But the Treasury is apparently unenthusiastic about a cut on the basis it would be inflationary. What would be the point in attempting to meet one of the Prime Minister’s pledges by stomping on one that you had already met?
Nonetheless, as Hunt has so often neglected to mention, tackling inflation is not his job, but the role of the Bank of England. Since Andrew Bailey is currently warning of the perils of a recession, he may be rather sympathetic to a budget orientated around a pro-growth tax cut. The inflationary consequences of stamp duty’s reduction or abolition would also pale in comparison to a Middle East energy shock.
Cutting stamp duty would also be of a piece with Hunt’s apparent desire to make tax relief on corporate investment permanent. Increasing business investment has been a public preoccupation of Sunak’s since his Mais lecture last year. It would complete the new balance between revenues and growth that was always the intended corollary to his hike in Corporation Tax.
It would also be a sign that this government has aspirations extending beyond the next year. For all their talk of making long-term decisions for a brighter future, this sounds like a short-termist Autumn Statement with the narrow objective of saving one’s seat. Do Sunak and Hunt really want to go down in history as the Prime Minister and Chancellor who used their only major tax cut to make life easier for their fellow millionaires?
Hunt should raise his sights from South West Surrey, and focus on tax cuts that would bring the greatest relief to the greatest number. Leave worrying about inflation to the Bank of England. And be conscious that – if Sunak does consider an early election over Rwanda a real prospect – this might be his last, best chance to make a Tory economic pitch to the country.