Rishi Sunak, the chancellor, has been warned by Conservative MPs not to order big tax increases on the wealthy and business to fill the fiscal hole left by Covid-19, amid signs of growing unrest on the Tory benches as they prepare to return to Westminster.
Government officials say Boris Johnson, prime minister, is also nervous about moves that affect core Tory voters, particularly pensioners, and predict tensions between Number 10 and Number 11 before the chancellor’s planned autumn Budget.
Tory disquiet over a series of government U-turns over the summer was heightened on Sunday by newspaper reports that the chancellor was eyeing a series of tax rises, including a £30bn hit on the wealthy, pensions and companies.
Although Treasury officials described the reports as “nonsense speculation”, Mr Sunak this month tried to prepare his party — and the country — for what he called “difficult decisions” to put public finances on a sustainable footing in the medium term.
Mr Sunak’s allies admit there will have to be substantial tax rises in future to rein in borrowing; the Office for Budget Responsibility has estimated the deficit could top £370bn for the 2020-21 financial year while accumulated public sector net debt rose above £2tn last month.
The chancellor is expected to set out a medium-term rescue plan for the public finances in an autumn Budget, but will not implement big tax rises until the recovery is entrenched. “We will have to be bold,” admitted one ally. “Tinkering around the edges won’t work.”
Treasury officials are working up a range of ideas, but the menu of options being drawn up for Mr Sunak are highly unappetising for many Conservative MPs.
The Sunday Times reported that Mr Sunak was considering raising corporation tax from 19 per cent to 24 per cent, raising £17bn in 2023-24, reversing the policy of former chancellor George Osborne of cutting the headline business tax.
Mr Osborne said on Sunday his policy had helped make the UK “the number one destination for investment in the G20”, but Mr Johnson’s government has already scrapped a planned further cut in corporation tax to 17 per cent.
Other options on the table include requiring people to pay capital gains at the same rate as they pay income, affecting second homeowners and small business people when they sell their company. Mr Sunak ordered a review of CGT in July.
Above a £12,300 allowance, CGT is currently charged on gains at 10 per cent for basic-rate taxpayers and 20 per cent for higher and additional rate taxpayers, or 18 per cent and 28 per cent respectively where the gains relate to residential property.
Another potentially big money-raiser for the Treasury would be to reform pension tax relief to remove or reduce the help given to higher earners. Mr Osborne proposed such a reform in 2016 but had to abandon in the face of a Tory rebellion.
Treasury minister Steve Barclay said the Treasury’s focus was on reviving the economy, but one government insider confirmed that “difficult options” were being considered to plug a fiscal hole in the event that Covid-19 left the economy permanently smaller than expected.
John McDonnell, former Labour shadow chancellor, could not hide his delight at some of the options facing Mr Sunak, tweeting: “Couldn’t make it up. Raising capital gains & corporation taxes straight from Labour 2019 Manifesto.”
Some Conservative MPs saw the reports as an attempt by the Treasury to “fly some kites”, while others speculated the briefings were intended to infuriate Tory MPs and strengthen Mr Johnson’s hand in resisting tax rises.
John Redwood, the Thatcherite former cabinet minister, said: “You cannot tax your way to faster growth and more prosperity. We need policies to promote more jobs and activity to get the deficit down.”
Marcus Fysh, another rightwing Tory MP, said “tax rises are the wrong response to the current situation”, adding: “We need to help the economy, not strangle it.”
Meanwhile Rob Halfon, Tory MP for the working class seat of Harlow, warned against fuel duty rises.
Mark Garnier, a former minister, said: “The problem is that until we know what the new normal deficit looks like, it’s hard to see how you can start increasing tax rates. Start too early and you stifle the recovery.”
Conservative MPs will meet this week to take stock of a chaotic summer marked by government U-turns, most notably over A-level grades, with Sir Graham Brady, chair of the backbench 1922 committee, expected to relay concerns to Number 10.
“It is becoming increasingly difficult for backbenchers now to promote and defend government policy as so often that policy is changed or abandoned without notice,” Charles Walker, 1922 committee vice-chair, told the Observer.
Although Mr Johnson hopes for an early breakthrough on a coronavirus vaccine, senior Conservatives fear the economic aftershock will define this parliament.
“Very few have really got their heads around the scale and political pain that is due to land,” said one former cabinet minister. “The medium-longer term economic response with be very problematic for the party in my view.”
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