Chancellor Rishi Sunak is expected to announce a multibillion-pound increase in corporation tax in the Budget © FT montage; HM Treasury/Bloomberg

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Chancellor Rishi Sunak has told Conservative MPs he wants to use his March Budget to start restoring order to the public finances, as he attempts to put “clear blue water” between the Tories and Labour.

Mr Sunak has warned Tory MPs in private meetings that their demands for extra public spending could force cuts elsewhere, or tax rises. “He wants to wean us off the magic money tree,” said one senior Tory MP.

Although the chancellor’s main focus in his March 3 Budget will be to support the economy through what he hopes will be the final phase of the coronavirus pandemic — requiring billions of pounds of extra support — he wants to take the first steps to tackle the virus-induced deficit.

He is expected to announce a multibillion-pound increase in corporation tax in the Budget. Further tax rises are expected to follow in a second Budget in November, to take effect once the recovery is fully under way and with a general election expected in 2024 still safely in the distance.

Mr Sunak has told Treasury colleagues he wants Britain’s corporation tax rate — currently 19 per cent — to remain “competitive” with its main competitors. But a rate as high as 23 per cent would still be below the average headline rate of OECD countries of 23.5 per cent and would raise almost £14bn each year. The Treasury declined to comment.

The UK's corporate tax burden is low by international standards, corporate tax rates, selected OECD economies (%)

“Rishi believes there needs to be clear blue water between the Conservative party and Labour,” said one ally of the chancellor. “There’s not much point to the Conservative party if we don’t want to put the public finances back on a sound footing.”

Mr Sunak’s stance is particularly aimed at Tory MPs who want an extension of the “temporary” £1,000 annual uplift in universal credit, which was introduced at the start of the pandemic and is due to end on March 31.

The MPs have proposed that the uplift, which costs £6bn a year, should continue until the Covid-19 lockdown expires in England. Mr Sunak has reminded them that the annual cost of the policy is equivalent to 1p on income tax plus 5p per litre on fuel duty.

David Gauke, a former Conservative Treasury minister, said: “It’s pretty clear that Rishi Sunak’s instincts are those of a fiscal conservative and he wants to take action sooner rather than later.”

Mr Gauke said Mr Sunak’s task was complicated by pressure from some Tory MPs representing constituencies in northern England who wanted higher public spending and by “a prime minister who’s very reluctant to take any difficult decisions before he really has to”.

However, one Conservative MP representing a former Labour seat in the north-east said many Tories in the region backed Mr Sunak’s push for fiscal discipline. “Our voters understand you can’t put this on tick,” added the MP.

The UK is set to run the largest peacetime deficit on record in 2020-21, with Mr Sunak poised to borrow more than £400bn.

Some borrowing will fall automatically as the pandemic wanes and the need for government programmes such as the furlough scheme diminishes.

Line chart of Public sector net borrowing, sum over previous 12 months (£bn) showing UK government borrowing in 2020-21 may exceed £400bn

But with continued pressure for high spending, and tax revenues likely to remain depressed in the recovery, the chancellor wants to steer the UK into what he calls a “sustainable fiscal position”. 

What Mr Sunak will determine represents stable public finances is unclear, and the Treasury has said that the March Budget is not the time to set out new fiscal rules. 

But international organisations including the IMF and the OECD are recommending countries such as the UK hold off fiscal tightening until the recovery is securely entrenched. 

Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said: “The first priority is to get the economy back on its feet. Then, but only then, we will need to pay the price.”

Business goes further, calling for more emergency support in the Budget. Tony Danker, the new head of the CBI employers’ organisation, said business resilience has “hit a sobering new low”.

There is no immediate pressure from financial markets to outline a plan for deficit reduction. The government on Thursday sold gilts due to be repaid in 2024 at a negative interest rate. Its 10-year borrowing costs stand at only 0.3 per cent, implying a significantly negative real interest rate.

Mr Johnson has suggested he does not want a return to austerity to deal with the deficit, although the Treasury last November cut £13bn from day-to-day spending plans by slashing overseas aid and freezing public sector pay and grants to local authorities — forcing them to raise council tax bills by 5 per cent in April.

Mr Sunak’s tax-raising options are restricted by Mr Johnson’s insistence that the Conservatives keeps their 2019 election manifesto pledge not to increase the rates of income tax, national insurance and value added tax.

However, a number of radical revenue-raising measures have long been gathering dust on the Treasury’s shelves for any chancellor bold enough to pick them up.

The Office of Tax Simplification, a government advisory body, last year suggested increasing capital gains tax, hitting the wealthy, second homeowners and those who own their own incorporated companies. This would hurt Tory voters in the south of England the most.

More dramatic options including reform of costly pension tax relief system or a root-and-branch shake-up of property taxes: measures that have been considered by previous chancellors and then dropped because of the public controversy that would accompany them.





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