We have cut taxes already and we’re going to cut them again. That is the message Rishi Sunak’s government wants to convey this week as January payslips arrive and voters notice (ministers hope) the 2p reduction in the rate of National Insurance contributions.
The Treasury appears increasingly confident that it will have scope for tax cuts at the Budget on 6 March. There was some fairly confident briefing to that effect at the time of the Autumn Statement but since then the prospect of lower interest rates has improved (reducing the government’s debt interest costs). Borrowing in December was lower than forecast and independent economists increasingly think that growth – and therefore tax receipts – may exceed expectations for the rest of the year. The talk is of an additional £10bn or so of fiscal headroom (currently £13bn), all of which the Chancellor appears set to use to cut taxes.
The political thinking is straightforward. Rishi Sunak wants to fight the next general election on the economy. Labour is polling ahead on this issue but the Tory hope is that this is a brittle lead caused by difficult economic circumstances. If living standards improve and there is some clear blue water between the parties on the economy, undecided voters might just break heavily to the Conservatives. Hence, all the Tory talk about Labour’s £28bn green investment pledge and the endlessly repeated accusation that the party would take us back to “square one”. At this stage in the economic recovery it does not feel as if we are very far advanced from square one but, it is hoped, by the time the phrase cuts through it will resonate with the public.
In fairness to Sunak, this strategy is his best hope. The more he can ensure his party is focused on winning this argument and not distracted (as it is prone to be) by calls for a campaign based on immigration, the better. There is a precedent, too. In 1992, the Tories were the underdogs, delivered pre-election tax cuts and fought an election campaign focused on the economic risks of a Labour government.
There are, however, at least four risks with the strategy.
[See also: Why Labour is still preparing for a May general election]
First, there might not be the money to deliver the tax cuts. This appears less of a risk than before but it is still possible that the Office for Budget Responsibility might not necessarily be the bearer of good news. In any event, before Jeremy Hunt can do anything else, he will need to find £5bn to maintain the fuel-duty freeze.
Second, the electorate might simply be ungrateful. After 14 years in office, the Tories no longer get the benefit of the doubt. Voters know that their taxes have gone up and – with the income tax thresholds remaining frozen – will continue to go up. Cutting taxes late in the parliament might just be viewed as a piece of cynical electioneering. Hunt is seeking to counter this impression by arguing that low taxes will deliver a thriving economy and that this, rather than political expediency, is the Tories’ motive. Whatever the merits of this argument, the voters may take some convincing, especially if he delivers tax cuts for which the economic case is weak, such as inheritance tax.
Third, the strategy assumes that what the public wants is lower taxes as opposed to better-funded public services. The polling suggests otherwise. YouGov recently asked voters if we should “spend more on public services even if that means not cutting taxes” or “cut taxes even if that means spending less on public services”. The public-spenders outnumbered the tax-cutters by 62 per cent to 22 per cent. Even among Tory voters, it was still 52-36 in favour of public spending.
We should be a little sceptical that the public always tells the truth in these polls. Exactly the same argument could have been made in 1992 but that did not stop John Major’s Conservatives returning to office (having received more votes than any party before or since: 14.1 million). It should also be noted, however, that 40 Tory MPs (including many from the right) have lobbied the Chancellor for a bailout for local authorities, that NHS waiting lists are a huge electoral issue, and that substantial spending cuts are already pencilled in for future years.
The fourth risk is the least likely but potentially the most electorally devastating. An aggressive tax-cutting agenda involves eliminating any fiscal headroom and relying heavily on spending plans that are unrealistic. What if the markets take fright, as happened after Liz Truss’s mini-Budget in September 2022? This probably will not happen but we have already had the asset managers BlackRock warn of the return of the “bond market vigilantes” if the political parties promise excessively loose fiscal policy. Both the Chancellor (and, for that matter, the shadow chancellor) would be wise to take note.
This final point brings out the potential tension within the Tory economic policy. The intention is to be both the low-tax party and the fiscally responsible party. It is possible to reconcile the two but ambitious tax-cutting runs the risk that neither the electorate, nor the markets, believe that what is being promised is sustainable. Presenting yourself as the fiscally responsible party does, after all, require you to be fiscally responsible. Even though the outlook for the public finances is brighter, the Tories’ room for manoeuvre to cut taxes is smaller than they might hope.
[See also: The end of the Brexit delusions]
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