Sunak thinks timing UK tax cuts just right can save the Tories

Sunak is riding on a wave of recent wins: a Brexit deal on Northern Ireland, an illegal migration law, meeting US President Biden and a possible end to strike action

By Alex Wickham and Ellen Milligan

Two days before Chancellor of the Exchequer Jeremy Hunt unveiled his first full UK budget, senior government ministers had a stand-up row about it, right in the heart of Parliament.

As they filed in to a crowded voting lobby on Monday night, Levelling Up Secretary Michael Gove loudly confronted Hunt’s deputy, Treasury minister John Glen. They had forced Gove to get their permission for projects of any cost, after privately accusing him of splitting large projects into smaller ones to ensure their funding wasn’t questioned, people familiar with the decision said.

An angry Gove accused Glen of making it harder to deliver on a key 2019 Conservative election promise to spread wealth and opportunity around the country, three witnesses said on condition of anonymity.

Also Read | PM Rishi Sunak hikes UK’s defence spending on US tour

Gove’s frustrations were familiar to other ministers who’ve recently felt stymied by the Treasury. They also speak to the chief political challenge Prime Minister Rishi Sunak faces over the next 12 months.

As his Conservative Party gears up for the next general election, expected in 2024, Sunak’s aides have zeroed in on a strategy they think can save them from a devastating defeat. Number 10 wants to project an air of quiet competence, cautious management of the economy and a focus on “delivery,” fronted by Sunak and Hunt as the “sensible” salesmen.

Now he has to convince the Tory party to trust the process. Staffers are bullish about what they see as a series of recent wins: a Brexit deal on Northern Ireland, a law on illegal migration, a trip to the US to see President Joe Biden, and a possible end to the wave of strike action that’s blighted Britain. They’re pleased that Sunak’s personal ratings have ticked up, seeing that as proof that a “President Rishi” policy putting the prime minister front and centre will woo voters.

But other prominent Conservatives, including some inside Sunak’s cabinet, want more. They are increasingly vocal in their view that the managerial approach from Downing Street is not enough to turn the polls around. The latest YouGov survey puts the Tories 19 points behind Labour. There are widespread demands within the party to go further, faster, whether that’s on tax cuts, finalizing public sector pay awards or prioritizing key departmental spending.

Number 10 is urging them to stay the course. Sunak is optimistic that by the time of the next budget, due in spring 2024, inflation will be under control. At that point, he can offer serious tax breaks to voters, according to a person familiar with his thinking. The prime minister signalled the plan at a pre-budget cabinet meeting on Wednesday where he reassured ministers that “as Conservatives we all want to reduce the size of the state and cut taxes,” the person said.

If encouraging inflation forecasts turn out to be accurate — the Office for Budget Responsibility sees it falling to 2.9 per cent by the end of 2023 — tax cuts could be possible afterwards, the person added.

Sunak could revive a pledge, made in his first leadership election campaign last summer, to cut income tax by a penny in 2024 and to reduce the basic rate to 16p by 2029, another person familiar said. That policy was dropped in the Autumn Statement as Hunt sought to repair the wreckage left by former Prime Minister Liz Truss.

The promise of tax cuts is red meat aimed at Sunak’s internal critics. If he can deliver, some Tory MPs believe the prime minister could then call an election as soon as May 2024. But they will have to swallow a dose of cold Treasury medicine first.

It remains unclear how the Treasury would find the money for tax cuts. Hunt this week ignored calls to reverse rises in personal and business taxes, and offered few “rabbits” from the hat. The headline announcements were a new childcare policy that doesn’t come in until 2025, and pension changes benefiting the rich, both reported beforehand. He still pushed his fiscal rules to the limit and left little wiggle room going forward.

There was a muted response from the Tory benches. One MP told Bloomberg the budget was “fine.” Another said it didn’t go disastrously wrong, but wouldn’t shift the dial either.

Inside the cabinet there are gripes that more ambitious policies weren’t announced. Hunt made a big play of boosting productivity and addressing a crisis in labour inactivity. But the reforms he announced to childcare, pensions and a program to encourage disabled people back to work would increase employment by just 0.3 per cent by 2028, the OBR said. The Treasury refused to countenance measures involving more radical tax incentives, a person familiar with the discussions explained.

Also Read | Will the Fed keep tightening as banks fail?

Business-minded ministers were unenthused, criticizing the lack of help for small firms, and arguing that the replacement of the super-deduction with full expensing of capital allowances was the bare minimum to prevent a cliff-edge for investment, rather than a policy to turbo-charge it.

There are even suggestions that Sunak himself was uninspired by earlier versions of the budget, which were even more modest, according to people familiar, though allies of Sunak and Hunt dispute that.

The week’s other big domestic news, that the government would offer National Health Service workers bonuses and a 5 per cent pay rise, also irritated some in government. Health Secretary Steve Barclay has privately lobbied the Treasury for months for a one-off payment to NHS staff to end the impasse, people familiar said. Several ministers had urged the government to strike a similar deal in January. Downing Street only relented once it could be sure inflation was falling, people familiar with the debate said. A government official said the Treasury’s caution before backing down was ultimately pointless.

In Number 10, the faith is strong that by the end of 2023, the public will have seen a sustained period of competent government and the poll gap will have narrowed. But with even some of his own ministers seeking bolder action, Sunak may need results sooner than that.