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24 March 2022

Rishi Sunak may live to regret his avoidable errors

The Chancellor’s decision to prioritise a tax cut in 2024 over help for the poorest looks risky, self-interested and slightly panicked.

By David Gauke

Last October, Rishi Sunak delivered a Budget and a Spending Review. The Office for Budget Responsibility (OBR) had upgraded its growth forecasts, the outlook for public finances had improved, and it was revealed that the government wanted public spending to increase – and that previously announced tax rises would be confirmed.

Many Conservative MPs disliked the idea; the Tory-supporting press hated it; and even the Labour Party began to attack Sunak as a high-tax Chancellor. He still remained the most popular member of the government but Sunak’s ratings among Conservative activists started to fall. His position as the obvious successor to Boris Johnson was in doubt.

As Sunak set out his personal objectives for the Spring Statement, we can be confident that at the top of the list was a determination not to repeat his experience of last October. This time he would show his critics that he was committed to lower taxes.

The result was an unbalanced set of measures. The tax cuts he announced (affordable because fiscal drag has increased tax receipts) are mostly sensible enough. There are valid objections to cutting fuel duty but the politics made it irresistible. Increasing the Employment Allowance was a good way to help small businesses hit by the increase in employers’ National Insurance (NI; I have a soft spot for Employment Allowance having devised it in 2013). He was right to resist calls from Labour and some Conservative MPs to drop the NI increases announced last year and to scrap VAT on domestic fuel. Both measures would have been badly targeted. Instead, he raised the NI contribution threshold, which was the most progressive tax measure he could take.  

The reason that the package was unbalanced was that, for the most part, he restricted himself to tax measures and, if you want to help the poorest, tax is not an effective way to do that. He has increased the Household Support Fund by £500m but this will barely touch the sides for those households dependent on benefits, who are about to see a 5 per cent fall in their real incomes.

[See also: “A KitKat is now a luxury”: the looming death of disposable income]

Universal Credit is set to rise by 3.1 per cent because that was the inflation rate in September. By April – when the new rates come into effect – inflation will likely be around 8 per cent. The system will sort itself out over time but that will be little comfort to those struggling to make ends meet over the next few months.

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If energy prices continue to remain high, it is likely that the energy price cap (now £1,971) will have to be increased again in October and, at that point, the Chancellor will surely have to return to Universal Credit rates. Nonetheless, the refusal to take significant action now to protect those least able to absorb higher prices is one that Sunak may come to regret.

The oddest element of the Spring Statement was the announcement of a 1p cut in income tax in 2024. Earlier in his speech, Sunak had highlighted to the House of Commons that the OBR has said that “there is unusually high uncertainty around the outlook”, and he went on to say that it is “too early to know the full impact of the Ukraine war on the UK economy”. Yet a few minutes later he announced a £6bn tax cut in two years’ time.

This is odd for a number of reasons. He is putting up the rates for a bad tax on income (NI, which is narrowly based) while bringing down the rates for a good tax on income (income tax, which is broadly based). And he is announcing it years in advance when the state of the public finances is particularly uncertain, undercutting the argument that he has consistently made – including in his recent Mais lecture – about the importance of fiscal prudence. Between now and April 2024 (when the rate cut will take effect), there will be four more fiscal events – Budgets and Spring Statements – in which the Chancellor could announce such a policy. It does not need to be announced now.

But maybe it does? The obvious reason for Sunak’s rush to establish his tax-cutting credentials is that he thinks there is a chance that a leadership election may be imminent, and he wants to address a predictable line of criticism from rivals. An alternative explanation is that the Chancellor can envisage circumstances in which his time at the Treasury comes to an end before he can deliver another Budget even without Johnson falling. It has recently been reported that his relationship with the Prime Minister had deteriorated to the extent that Sunak was considering resigning (reports denied by those around him). He wants to leave his mark as a tax-cutter while he can.

Either way, the 2024 tax cut announcement reveals a Chancellor uncomfortable with finding himself on a different side of the argument than many natural Conservative supporters. He appears to have calculated that it is in his interests to address this political weakness as soon as possible. Alternatively, he is just very sensitive to criticism from Conservative colleagues.

Sunak’s strength has been that he is the grown-up in government – fiscally responsible and acting in good faith. In contrast, the 2024 tax cut looks risky, self-interested and slightly panicked. The announcement of an income tax cut in 2024 does him little credit.

[See also: How Rishi Sunak blew it]

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