Philip Hammond needs to increase taxes, but Conservative MPs won’t let him. That is the dilemma that the chancellor, burdened by Brexit and Theresa May’s promise to end austerity, faces ahead of next week’s budget.
The Treasury needs to fund a substantial increase in spending somehow. Hammond has already committed to more spending for the NHS, and Conservative MPs are in increasingly mutinous mood over the underfunding of Universal Credit.
The prime minister’s messaging on austerity has made the need to fulfil those political imperatives all the more acute. Brexit, too, makes Hammond’s job even harder. He must somehow balance its economic and political realities – namely demands for an optimistic budget from Tory Brexiteers and the DUP, both of whom have threatened rebellion, and the lack of any real grounds for one.
These are circumstances which, plainly, demand quite a lot of new money. But where can Hammond find it from? When the extra £20 billion for the NHS was announced in July, sources close to Hammond suggested that the first increase in fuel duty for eight years would pay for it. Theresa May announced it would be frozen for the ninth consecutive year in her speech to Conservative Party conference three months later.
There is Hammond’s problem in a nutshell. In these febrile times he has neither a parliamentary majority nor a functioning party to rely on, so any tax rise or spending cut that alienates more than a dozen Tory MPs is out of the question. That was the problem with increasing fuel duty, a proposition opposed by the 13 Scottish Conservative MPs and dozens more in rural seats and marginals.
The same is true of most other taxes. Backbenchers say Hammond will face similar opposition if his budget hits voters in the wallet. “I asked [Theresa May’s chief of staff] Gavin Barwell last week if, after the budget, I could go back to my constituents, look them in the eye and tell them we are still the party of low taxation,” says one. “Anything that avoids hitting the pound in the pocket is good.”
Government sources agree with that analysis, uncomfortable though it is for the chancellor. The fundamental problem is that, as far as fiscal policy goes, good politics does not equal good policy. Maintaining the freeze on fuel duty is a prime example of this; ditto the yearly increases in the tax-free personal allowance. It’s deft fiscal populism but bad policy. Or as Tory MPs call it: a vote-winner.
Though the Treasury does not exist to keep Tory MPs happy, in a minority parliament it cannot do anything but. The only taxes they will swallow without a fight are those that they will not hear about on the doorstep, like the planned hike for offshore gambling companies reported yesterday. But that will not be enough to plug the black hole Hammond is staring into. A bumpy week awaits.
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