LONDON — Six months after Liz Truss’ ‘mini-budget’ meltdown, tax cuts remain a highly-prized ideal among U.K. Conservatives.
Under the new Tory regime, they look set for short-term disappointment.
U.K. Chancellor Jeremy Hunt will give his budget speech Wednesday — the first time there’s been a full-fat budget since October 2021, when someone called Rishi Sunak was in charge at the finance ministry.
Hunt will ask the country, and his party, to hold tight in the face of a murky outlook for growth in 2023, resisting all calls for major tax cuts. It was reported by the Guardian Tuesday evening that what small fiscal headroom he has available will be spent on increasing free childcare for working families.
That policy will be warmly welcomed, given the U.K.’s painfully-high childcare costs, but it’s not the only rabbit his backbenchers had hoped to see plucked from the chancellor’s hat on Wednesday afternoon. After all, it wouldn’t be budget week without Tory MPs demanding ways to lower taxes.
This year the traditional calls of the Tory right have added piquancy, pitting the approach of the current prime minister and chancellor against those of their recently-deposed predecessors.
Proponents of tax cuts and supply-side reforms as a route to economic growth recently found their voice in the short-lived premiership of Liz Truss. And they continue to make their case in 2023, despite her messy exit from Downing Street last October, four weeks after she and Chancellor Kwasi Kwarteng tanked the U.K. economy with precisely the approach they advocate.
Asked if Truss-ites would be on the warpath this week, one of her long-serving loyalists was sanguine.
“That’s what political parties are for,” he said.
While Truss may have crashed and burned inside 50 days, her free-marketeer wing of the Conservative Party had a life long before her. And a caucus of backbench Tory MPs is now trying to ensure it survives far into the future as well.
Her fellow travelers, led by her former Cabinet ministers Simon Clarke and Ranil Jayawardena, formed the Conservative Growth Group back in January in a bid to ensure that low taxes and deregulation do not fall off the Tory agenda.
Proponents of tax cuts and supply-side reforms as a route to economic growth found their voice in the premiership of Liz Truss | Leon Neal/Getty Images
They may have at least small reasons to be cheerful on Wednesday, with Hunt poised to increase the amount the richest workers can accumulate in pension savings before paying extra tax — a policy they’ve previously called for.
Mark Littlewood, director of the Institute of Economic Affairs, one of the right-wing Westminster think tanks so influential on the Truss agenda, said that while the government deserved credit for making the pensions change, he was still preparing for “plenty of bad news” in Wednesday’s budget.
He cited the planned rise in corporation tax, observing: “If the last administration was guilty of unfunded tax cuts, perhaps this administration is guilty of unfunded tax rises.”
John Redwood, a member of the Conservative Growth Group, also attacked the policy, introduced by Hunt late last year to reassure markets spooked by Truss’ rapid tax-cutting approach. “We’ve seen in the past when governments have had the courage to cut certain tax rates on corporate income, they’ve actually collected rather more revenue and not less,” he told POLITICO.
One of Truss’ signature promises — “investment zones” to boost employment in struggling areas — is set to resurface in the budget, but is unlikely to cut the mustard for its original proponents. Hunt’s revamped plan “looks more like subsidy zones than investment zones,” complained one Truss ally.
A government official defended the plan, saying the new areas will come with tax reliefs similar to those for freeports, rolled out on a more manageable scale than that envisioned by Truss.
The ex-prime minister is not expected to chip in herself on Wednesday’s budget, but “remains strongly of the view” that supply-side reforms are essential to growth, another ally said.
While low-tax Tories remain convinced of their arguments despite the Truss disaster, they seem further away than ever from realizing their dream.
As well as the rise in corporation tax, disposable incomes will also take a hit this year if tax thresholds remain unchanged, with high inflation meaning more and more people get dragged into higher tax bands.
At the same time, the scale of spending on the U.K.’s under-pressure National Health Service is unlikely to come down, while more money has been promised for the defense budget and energy bills in the wake of the Ukraine war.
The Institute for Fiscal Studies’ Paul Johnson warned earlier this year he would be “very surprised” if the total sweep of British taxes come down much below 37 percent of national income “in my lifetime.”
Even a former member of Truss’ Cabinet admitted privately the chancellor is “pretty constrained” at present, and that now would not be the right moment for significant tax cuts.
Indeed some believe a cautious — or even boring — budget would be the best outcome given the chaos of 2022.
“The Treasury itself doesn’t want people to let up so soon after the Kwasi Kwarteng disaster,” said Giles Wilkes, a former No. 10 economic adviser. “They want everyone to keep some discipline.”
“We are still clearing up some of the mess,” one senior Tory MP sighed.
Prudence now, some Tories believe, might allow Hunt and Sunak to store up cash for vote-winning policies closer to the next general election, due in 2024.
But others insist an eye-catching agenda and rapid economic growth are needed urgently, before the opposition Labour Party’s already-sizeable poll lead becomes insurmountable.
Sunak, after all, is still disliked by many of his colleagues for his decision to withdraw support for Boris Johnson last summer. It remains a problem simmering under the surface that he secured the top job almost by default last fall after Truss had imploded.
“The party is extremely fractious,” said Henry Hill of grassroots bible ConservativeHome, “and Rishi Sunak doesn’t currently have the sort of forward momentum that normally drags Tory MPs into line.”
Dan Bloom contributed reporting.