Rishi Sunak’s UK Conservatives are in a state of shock this week.
But it’s not the bullying scandal that forced Gavin Williamson to quit the new premier’s Cabinet after just two weeks that’s preoccupying Tory Members of Parliament. Rather, it’s a different set of headlines about major tax rises that Sunak and Chancellor of the Exchequer Jeremy Hunt are weighing to help fill a £35 billion ($41 billion) fiscal hole.
Reports they’re seeking to raise more money from income tax, windfall charges on energy companies and levies on inheritance have spread panic and skepticism across the Tory party, dominating conversations in the wood-paneled House of Commons tea room where British lawmakers meet daily for a gossip and a brew.
The grim mood was evident in conversations with multiple Tory MPs, ministers, aides and officials this week.
The party elected Sunak leader to restore calm after Liz Truss’s calamitous seven weeks in power unleashed chaos in the financial markets. But whereas Truss had promised a low-tax Tory nirvana, her successor appears to be heading the other way as he and Hunt prepare to unveil an Autumn Statement -- a budget in all but name -- on Nov. 17.
Not only do the two men want to plug the yawning gap in the nation’s finances; they’re seeking a buffer in case things take a turn for the worse, meaning spending cuts and tax hikes could reach £50 billion or more.
Gloomy media reports about what Hunt is considering have dripped out daily, with the Treasury failing to knock them down. Measures being examined include increasing capital gains tax, reducing the tax-free allowance for dividend income and letting local authorities raise more money from council tax.
Some MPs are lobbying Sunak and Hunt to soften their proposals, warning they couldn’t vote for some of the ideas being floated. It’s a reminder that Sunak’s policies are dependent on the support of his MPs, and illustrates the breakdown in the government system of “whipping,” by which it enforces party discipline. Though not a whip, Williamson was a key enforcer for Sunak.
Flying Kites
In a sign the premier is listening -- though not necessarily making promises -- several Tories described being “blue ticked” by Sunak over the last few days: sending him a message on WhatsApp, seeing he’s come online and read it, before going offline without replying.
Many Tories believe some of the mooted tax rises are kites flown by government advisers to set expectations for the statement so low that the eventual announcements don’t seem so bad. It’s a tactic regularly deployed by Sunak when he was Chancellor.
Of most concern to Tory MPs is the suggestion that the top rate of income tax may be raised to 50%, a level not seen since the days of former Labour prime minister Gordon Brown, and a breach of the party’s 2019 election promises.
Multiple MPs told Bloomberg they don’t believe the proposal is genuine, arguing that when colleagues do moan about the contents of the eventual budget, Hunt will be able to say to it could have been worse. One said if he follows through, there would be no reason to vote Tory over Labour at the next election.
Stealth Taxes
Even if the tax rate isn’t touched, officials said Hunt could lower the threshold at which it’s paid. He is also considering extending a freeze on other income tax thresholds, pulling millions of people into higher tax bands thanks to soaring inflation. This so-called “fiscal drag” is a massive stealth tax that Conservatives should oppose, one MP said.
Another levy in the chancellor’s crosshairs is inheritance tax, according to officials. Traditionally, the Tory party has accused their Labour opponents of wanting to raise “death taxes.” But Hunt is mulling freezing the rate at which the tax starts to be paid-- effectively a tax rise with inflation running at more than 10%.
That would be unthinkable for the Conservatives heading into an election, another MP warned. The newspapers this week read like a Tory suicide note, they said, recalling a brutally effective 1992 Conservative poster campaign using a picture of a bomb with the words “Labour’s tax bombshell.” Their opponents could revive it and use it against them, the lawmaker said.
Business-minded Tory MPs are also unimpressed with the idea that Hunt could extend a windfall tax on oil and gas companies by reducing the saving for firms that invest in domestic extraction. This incentive was a key part of the tax, and lowering it would harm Britain’s energy security, said a former minister involved in its planning.
`Bring Back the Lettuce’
The government is also set to announce the outcome of its consultation on an online sales tax, with one official saying it’s being seriously considered. Business lobbyists argue it would exacerbate a recession.
A budget consisting of stealth tax rises and deferred spending cuts could be framed as making those with the broadest shoulders bear the greatest burden, but walking the line between keeping markets calm and convincing voters the Tories are not presiding over economic carnage is a challenge that could define Sunak’s premiership.
Most Tory MPs agree that the richest should pay most, but their fears are centered on tax rises worsening the pain felt by middle class voters hammered by higher energy and mortgage bills.
At prime minister’s questions in the Commons on Wednesday, one Labour MP heckled Sunak: “Bring back the lettuce,” in reference to an unflattering tabloid newspaper depiction of Truss. The worry for Tory MPs now is that while Truss’s wide-ranging tax cuts were unpalatable to the markets, the risk is her successor goes too far in the other direction and puts off Conservative voters.
©2022 Bloomberg L.P.
