Theresa May’s promise of an extra £20bn for the NHS has left Philip Hammond with the unenviable task of working out how to pay for it.
The pretence that the so-called Brexit dividend could foot the bill lasted about five minutes, and the Chancellor must now answer an inevitable but politically vexed question: which taxes will increase instead?
A Guardian report – which has not been denied by the Treasury – suggests the answer is likely to be fuel duty, which has been frozen for the past eight years.
The freeze is deft fiscal populism but bad policy (like so much of George Osborne’s back catalogue). Since the 2011-12 tax year, it has cost the exchequer £46bn, and will cost a further £26bn by 2021. In theory, it would more than cover May’s promise of an extra £20bn for the health service until 2022. (Freezes on alcohol taxes, which Hammond is also considering lifting, cost £200m a year).
So why are Conservative MPs wary? Some think it is good policy but bad politics. Defending a cost of living increase on the doorsteps at the next election – be it caused by a hard Brexit or tax rises – is not something they want to do. They believe increases in general taxation, which fuel duty basically is as far as their electorate is concerned, are bad, and the burden should instead be shifted onto “choice taxes”. Otherwise, one asks, what would the party’s unique selling point be when compared to Corbyn?
Others think it is bad politics and bad policy. There are two recognisable groups of Tory MPs who think so: those who have made it their mission to champion the lower-middle classes and the white van man, and those who represent rural constituencies.
The former group, which includes the likes of Rob Halfon, believe lifting the freeze would unfairly penalise working families. Coverage of the backlash to the plans has focussed almost exclusively on these objections.
The latter group, though they lack a catchy, tabloid-friendly pitch, is potentially much more important. They object to any increase on the grounds that it would increase the tax burden on those who live in rural communities. This faction is also much greater in number and any one of its constituent parts – for instance, the 13 Scottish Tory MPs, whose seats are all rural – is greater than the government’s majority.
Add to these several dozen Tory backbenchers the ten DUP MPs who lobbied Hammond to maintain the freeze ahead of the last budget, and it is difficult to see the Chancellor managing to drive it through. (Similarly, a backlash from backbenchers forced him to drop reforms to national insurance contributions for self-employed workers proposed in last year’s budget – another instance of the desire to avoid bad politics trumping the need for good policy.)
But that speaks to an altogether more serious challenge for May and Hammond. Faced with calls from within cabinet to increase spending and the prospect of Brexit hitting the public finances, it’s clear that somewhere along the line taxes will have to increase in a fairly significant way, and reasonably soon (Hammond might be a fiscal hawk, but the reality is that there is too little left to cut). The government’s lack of a majority – and the fiscal straitjacket its MPs would prefer it locked in – will make it very hard for them to do so.
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