Rishi Sunak’s New Year budget could see taxes hiked (Image: Getty)
The two camps are split over whether to balance the books and pay off the coronavirus debt quickly with tax rises and austerity or to cut taxes and hope for a longer term solution with economic growth. A source close to the Prime Minister has told the Sunday Express that there is “little room for manoeuvre” and that the coronavirus bailout packages and impact on the economy mean the public finances “are shot”. The source suggested that there “may be little choice” but to raise taxes to start paying off the public debt.
“We have to balance the books,” the source added.
But another insider has made it clear that a number of senior ministers now believe that the country will need a tax cut to recover.
“We have to treat this money [coronavirus rescue package] as a one off and not try to claw it back all at once,” the minister said.
“This country is already over taxed as it is and any more taxes could mean that we choke off the recovery which we must not do.”
The minister suggested that the so-called Laffer curve – the theory that if you cut taxes the amount collected goes up because of economic growth – “must be tested” in a bid to “boost economic growth”.
There was also strong opposition to “hypothecated taxes” which are special increases to pay for one off issues.
The impact of Covid on the economy means there is ‘little room to manoeuvre’ on taxes, sources claim (Image: Getty)
“You never raise enough and it just means people pay even more.”
It is understood that the tax cutters in government want to see corporation tax slashed possibly to Irish levels of 12.5 per cent to boost the economy and attract more foreign business into the country.
There is also strong support for tax cuts on the Tory back benches and fierce opposition to tax rises.
One Blue Collar Conservative MP from the 2019 intake said: “I did not come into politics to raise taxes.”
Another veteran Tory added: “There will be strong resistance to tax rises, we will have to cut to get the economy going.”
Another MP added: “In 1997 we [the Conservatives] managed to balance the books and have the economy in good shape just in time for Labour to take over and spend it all. Balancing the books quickly does not necessarily work especially with voters.”
The row over the Budget expected in the New Year could become a test of Boris Johnson’s leadership with a whispering campaign already underway about the Prime Minister quitting.
But there are also already briefings against the favourite to succeed him, Mr Sunak.
One senior government source said: “Everybody has noticed that when it is good news Rishi is out there making the announcement with a big smile, but when it is bad news like not paying for free school meals he is nowhere to be seen and the PM has to front it up.
“Ministers are not very impressed with this approach. If the Treasury withholds money it is the Chancellor who should explain why.”
John Longworth, a leading Brexiteer who now chairs the Independent Business Network fears the Treasury may undermine the “enterprise and incentive” upon which the economy depends.
John Longworth fears the Treasury may undermine ‘enterprise’ (Image: Getty)
He said: “History offers us a cookbook out of this crisis. It shows that the country’s return to prosperity is not through a return to the economic ruin of the 1970s showcased by eye-watering tax hikes and irresponsible spending.
“Instead, it’s through an embrace of free enterprise, which proved the country’s salvation in the 1980s . . . the Prime Minister and his Chancellor must not bite the hand that feeds our economy.
“Instead, the government needs to incubate and nurture our economy by ensuring the right conditions for it to work effectively. This means a programme of deregulation and tax cuts rather than overworked state intervention.
“Alarmingly, however, the signs coming from the Treasury suggest it is pursuing a strategy that is not in favour of enterprise and incentive, but instead undermining it. The Government must avoid at all costs a populist race to the soggy bottom.”
Daniel Kawczynski, the Conservative MP for Shrewsbury and Atcham, insisted that the way out of the economic crisis is “an unprecedented lowering of taxation for low income working families”.
MPs have called for taxes for low income families to be reduced (Image: Getty)
He said: “As a fiscal Conservative, balancing the books has always been a mantra for me but given the devastation this virus has caused we need a temporary halt to prudence and to slash taxation for low income families. [The] rate you pay tax at should be raised to £16,000.”
Mr Kawczynski also expects the Government to take advantage of post-Brexit freedoms and bring down the cost of imported goods by slashing tariffs.
Julian Jessop, a fellow at the Institute of Economic Affairs, argues that tax cuts would not force the Government to scrap plans for infrastructure projects in former industrial regions.
He said: “The idea that taxes have to rise to pay for higher investment is fundamentally flawed. If infrastructure spending is worthwhile it should eventually pay for itself. In the meantime, it can be financed by increased borrowing at the current very low interest rates.”
Warning that tax rises could kill off hopes of a post-pandemic recovery, he said: “An increase in the tax burden on struggling companies and working families would also risk choking the economic recovery. It would be better to focus on policies that boost growth, including targeted tax cuts that could actually lead to an increase in tax revenues.
Higher taxes could delay economic recovery (Image: Getty)
“Examples of tax cuts that should be prioritised including reducing employer national insurance contributions (a tax on jobs), lifting more poor families out of income tax altogether, increasing allowances for business investment, and making the stamp duty holiday permanent.”
Jonathan Isaby, director of the Politeia think tank, also sounded the alarm bell about the danger of tax hikes.
He said: “As the country seeks to recover from the economic shock dealt by the pandemic, the last thing the Government should be doing is considering tax hikes, which would in all likelihood stifle the prospects for growth while failing to increase overall revenue.
Instead, ministers need to look at how cutting certain taxes could stimulate the economy while resisting calls for ever higher public spending, which simply means piling up further debts for the future. Higher taxes and higher spending is categorically not the way to deliver a sustained economic recovery.”
Former Welsh Secretary David Jones urged the Government not to put jobs and businesses in peril by raising taxes.
He said: “I think that the last thing this country needs, given the economic impact of Covid, is anything that puts a dampener on the economy and undoubtedly increased taxation would have that effect… We’ve got to get people back into work and the more people who are in work, the more economic activity there is and therefore ultimately the tax take balances itself out – you won’t do that by trying to tax people out of existence, which is what would happen to a lot of businesses.”
