Cabinet split over austerity tax row

Chancellor at odds with other senior ministers over funding of public services

A CABINET split emerged last night between the Chancellor and senior ministers over whether taxes should be raised to pay for increased spending on public services.

Michael Gove said taxpayers would not foot the bill amid signs the Tories will end the public sector pay cap and put more money into schools, hospitals and the Armed Forces.

But his remarks put him at odds with Philip Hammond, who is understood to have privately warned ministers that unpopular tax rises will be required.

Last night it emerged that Boris Johnson, the Foreign Secretary, also supports ending the public sector pay cap as long as it is done in a “responsible way”. Justine Greening, the Education Secretary, has called for an extra £1 billion for school funding amid threats of a Tory back-bench rebellion by as many as 40 MPS if the Chancellor does not end the cap.

Mr Hammond is said to have warned colleagues at a Cabinet meeting that their demands for extra money would force questions about who ministers want to alienate with extra tax rises.

And speaking in the Queen’s Speech debate last week, he said that borrowing more money would force future generations to pay a heavy price, while refusing again to rule out extra taxes.

However, asked by the BBC’S Andrew Marr yesterday if taxes should rise to pay for more public spending Mr Gove replied: “I don’t see any reason why they need to”. Mr Hammond is also understood to have insisted that no changes should be made until the autumn at the earliest. But in a further clash, ministers argued that any delay would mean the political damage was already done.

One source told The Sunday Times: “If a public sector pay review body says bust the cap, which I’m sure they will, are we going to say no? If there is a strike involving nurses, do we really think we are going to see that through for 12 months? We’d have to cave in anyway. We need to get on to the front foot.”

Mr Hammond’s view, shared by Theresa May according to Whitehall sources, is that the Government must send a signal that it is listening after the Conservatives lost seats in the election. However the Chancellor has also warned against losing sight of bringing down the deficit in the coming years.

And Greg Hands, the international trade minister, yesterday said: “There’s no change in government policy. We must live within our means and that is the right thing to do. We’ve reduced the deficit by three quarters since 2010 – that is work that is still ongoing.”

Sources close to the Chancellor claim Mr Hammond wants to increase the levy paid by self-employed workers because they pay much less than those who work for a company, but he failed to get his plans through Parliament at the last Budget. The Government’s

slim majority following the general election is seen to have made this impossible to achieve.

Economic experts believe Mr Hammond could instead look at limiting pension tax relief for high earners or cancelling a planned cut in corporation tax to save around £4billion.

However, the Institute for Fiscal Studies has calculated that removing the public sector pay cap would cost at least £6 billion a year, rising to £9.5 billion.

Last week Number 10 indicated that the cap could be lifted, something Mr Gove said he supported yesterday as he hinted that it is the “collective view of the Government” that the pay review bodies should be listened to.

They are expected to recommend increasing pay as they report over the summer.

His comments follow accusations of a Government “shambles” on the issue after a Number 10 source on Wednesday told reporters Mrs May was ready to listen to the pay review bodies’ recommendations, only for her official spokesman and the Treasury to insist “the policy has not changed”.

On Saturday night, a No 10 source said the Government was responding to the recommendations of pay review bodies which are currently reporting to ministers “on a case-by-case basis”.

A Government source said ministers have accepted that there is pressure to re-think Conservative plans to plough ahead with cutbacks following the election but there is a deep rift growing over how to achieve it.