Monday, December 4, 2023

Backbench splits complicate Chancellor’s job as he considers tax cuts

Must read

As the Chancellor prepares to deliver his autumn statement on Wednesday, he will have more than half an eye on the competing demands of different Conservative factions.

The central split has been over taxes – which to cut and how far to cut them, with different backbench groups pushing different priorities.

The past year has seen some division over whether to cut taxes at all. While virtually all Conservative MPs believe the overall tax burden is too high, Rishi Sunak and Jeremy Hunt have repeatedly stressed the need to balance tax cuts with fiscal responsibility and “balancing the books”.

Even as recently as October, Mr Hunt was warning that a large tax cut would be “inflationary” and suggesting the state of public finances would not allow room for cuts.

That debate now appears to have been settled, with Mr Sunak signalling on Monday that a fall in inflation meant he could start to reduce taxes.

However, he continued to stress the need to cut taxes in “a serious, responsible way, based on fiscal rules to deliver sound money”, which may put him at odds with the sections of his party pushing for significant cuts this year.

What those tax cuts should look like is also a subject of division among Conservative MPs, with different groups making their own suggestions over recent months.

The most limited programme of tax cuts has been proposed by the moderate One Nation group, chaired by former deputy prime minister Damian Green.

In a report prepared by former minister Stephen Hammond and published on Monday, the group’s main tax cut focuses on businesses, with a call for the “full expensing” regime introduced in March’s Budget to be made permanent and extended to cover research and development.

The regime, which allows businesses to offset investment in machinery against their tax bills, is currently temporary but has been seen as a key method for boosting business investment.

Otherwise, the One Nation group has largely warned against significant tax cuts. Instead, the group has suggested rebalancing taxes to ensure that all income – whether from salaries, dividends or capital gains – is taxed equally.

On the other wing of the party, allies of Liz Truss have pushed for a broad sweep of cuts to both business and personal taxes, with the former prime minister’s Growth Commission publishing its recommendations last week.

Among those recommendations is cutting corporation tax from 25% to 19%, with a long-term plan to reduce the duty to 15%, and reducing the burden of income tax and national insurance to pre-pandemic levels.

This latter cut might not involve a reduction in the headline rate, but rather the unfreezing of personal allowances and the reintroduction of the personal allowance for those earning more than £100,000 a year.

The Truss-backed Growth Commission also recommends considering cutting or abolishing inheritance tax – something senior Tories such as Nadhim Zahawi have called for – and stamp duty.

Other groups of Conservative MPs have lent their support to tax cuts in recent months, including the New Conservatives, a group of northern and Midlands MPs elected in 2019.

Their specific proposals have been a mix of personal and small business cuts, including raising the VAT threshold to £250,000, scrapping the high income child benefit charge, and changing the rules to give more relief to the self-employed.

The Chancellor is unlikely to be able to satisfy all these demands, and the Prime Minister himself said on Monday that the Government would need to prioritise which taxes to cut, leaving the Treasury to find a way to balance the Conservative Party’s competing factions.

While most of the focus has been on tax cuts, there are further trade-offs that the Chancellor will have to consider.

One is the level of investment by the Government in the areas the Conservatives won for the first time in 2019, mostly in the North and Midlands.

Many first-time Conservative voters will have been persuaded by Boris Johnson’s promise of “levelling up” and greater investment in public services, while more traditional Tory voters in southern areas may prefer a greater focus on tax cuts.

If the Chancellor chooses to use his “headroom” to pay for tax cuts, that will leave less money available for the investment that some voters are looking for at a time when public services are increasingly strained.

Few of the proposals put forward by the Conservative factions have focused on spending, choosing instead to talk about taxation, although the Growth Commission did highlight the need for investment in infrastructure and provided “some additional scope for increasing spending more generally to improve public services”.

The Chancellor therefore faces not only a party divided on how and where to make tax cuts and investments, but also an electorate split on its economic priorities – and he must solve all these problems with what is likely to be very limited room for manoeuvre.

Latest article