Chancellor Rishi Sunak has urged Tory MPs to back his efforts to keep public spending under control in this month’s Budget, with some Conservatives and economists believing fiscal discipline now could provide space for pre-election tax cuts.
Sunak is under mounting pressure from Labour and some Tory MPs to increase support for households to avoid a cost of living crisis this autumn, while ministers are demanding more money to help public services recover from the coronavirus crisis.
But Sunak has told colleagues that further increases in spending — beyond what is already planned — will result in more tax rises.
Last month Sunak announced a £12bn annual rise in national insurance contributions to increase funding for the NHS and social care.
Some Tory MPs believe that if Sunak can bear down on the deficit in his October 27 Budget — which will also set Whitehall departmental budgets for the rest of the parliament — he can start cutting taxes before an election due by 2024.
“Rishi has said he’s going to be tough on spending in the short term and that will mean we can go into the next election promising tax cuts,” said one Conservative MP.
Another Tory said Sunak had told MPs to “hold our nerve” on spending. Recently some Conservatives urged the chancellor to retain a temporary £20-a-week uplift in universal credit, costing £6bn a year, but Sunak resisted.
Some Tories believe Sunak will have to start cutting taxes before the next election to prove the party has different priorities to Labour leader Sir Keir Starmer.
That has become all the more important after Sunak last month broke one of the Conservatives’ 2019 election manifesto promises when he raised national insurance rates.
One senior Tory said: “Everyone is painfully aware that if we are going to go into an election with a message on tax which is not like the other lot, you can’t just do that in the manifesto.
“There would have to be a demonstrable path which had already been embarked upon. Rishi understands you cannot just say we are low tax Conservatives.”
Sunak’s aides denied the chancellor was discussing tax cuts. “MPs know that we have taken some very difficult decisions in recent months — he’s not talking to anyone about tax cuts at the moment,” said one.
Economists said that while the public finances appear tight at the moment, there are signs that the outlook could look better if the UK fiscal watchdog took the view that the persistent damage from the Covid-19 crisis was not as deep as currently forecast.
Tim Pitt, a partner at Flint Global and a former adviser to Philip Hammond as chancellor, said: “It is an entirely plausible scenario that the scarring forecasts from the Office for Budget Responsibility were overly pessimistic, releasing funds for the chancellor as we come out of Covid.”
Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said that with a “tight spending review”, future favourable forecasting changes would “give the chancellor space to cut taxes”.
Both Pitt and Johnson cautioned there would be serious pressure on spending as Britain recovered from the Covid-19 pandemic. The country’s ageing population will also heighten pressure for higher spending and taxation in the medium term.
Under Sunak, the overall tax burden is heading for 35.5 per cent of gross domestic product, the highest level since 1950.
Sunak is expected to use his Budget to set out new fiscal rules to constrain spending.
He wants to balance the budget for day-to-day spending by the end of the parliament and ensure underlying debt starts falling by 2024-25, according to people briefed on his thinking.