Pre-budget panic over cost of Hunt’s tax cut
Anger over windfall levy led to fears Scottish Tory leader was ready to walk over announcements
By Nick Gutteridge, Dominic Penna, and Simon Johnson
IT WAS at a little after 7pm on Monday that Rishi Sunak’s pre-budget charm offensive turned sour. Surrounded by chattering Tory MPS sipping warm white wine and munching on crisps, the Prime Minister found himself embroiled in a stand-up row with Douglas Ross.
The leader of the Scottish Conservatives had doggedly sought out Mr Sunak across the crowded, stifling room, determined to give him a piece of his mind about the Treasury’s plans to extend the windfall tax on North Sea oil and gas giants for an extra year.
What followed was a “heated” discussion between the pair, with Mr Ross warning the move would hammer the Tory vote north of the border and the Prime Minister countering that it was necessary to deliver a National Insurance cut for millions of workers.
A clearly dissatisfied Mr Ross then sought out Jeremy Hunt, the Chancellor, and delivered a last-ditch plea to him to drop the measure from today’s Budget. While his demands ultimately fell on deaf ears, they prompted severe unease in Downing Street.
No 10 began to fear that their party’s Scottish leader was planning to resign in protest at the decision – a move that would have gone down well with core Tory voters in Aberdeenshire, but would have put on a disastrous display of disunity on Budget day.
So deep ran their concern that Simon Hart, the Chief Whip, was asked to summon Mr Ross to his office yesterday afternoon to explain the decision. Alistair Jack, the Scottish Secretary, was also mobilised to “talk him down” amid fears he would quit.
At the meetings Mr Ross agreed to keep a lid on his deep anger until after the Budget had been announced, but warned the pair he would be publicly criticising the decision afterwards amid fears it would wreck the Tories hopes of holding onto three key seats.
The episode demonstrated the extent to which the Prime Minister and the Chancellor have been forced to walk a tightrope as they weigh up competing tax and spend demands from Conservative MPS with the need to balance the books. In an effort to smooth over internal tensions Mr Sunak had invited all 348 of his MPS to a drinks reception in his parliamentary office, tucked away behind the Speaker’s chair.
Those in attendance said around 80 to 90 turned up for the soiree with many colleagues in a “surprisingly good mood” despite dire recent polling which shows the party on just 20 per cent and facing a defeat of historic proportions at the next general election.
The Prime Minister was said to be on humorous form, while Mr Hunt struck a more sombre tone and batted off questions from a succession of backbenchers by warning that the lack of cash meant he was drawing up his Budget in “really difficult circumstances”.
Behind the scenes the Chancellor had been warned in a series of ever more gloomy internal reports from the Office for Budget Responsibility, the Government’s spending watchdog, that his pot of cash for implementing personal tax cuts was shrinking by the week.
The OBR handed him a calculation on Valentine’s Day which showed that his “fiscal headroom” – the amount of money available to use without breaking his own borrowing rules – had shrunk from more than £30 billion last autumn to less than £13 billion.
While the Treasury had anticipated a dip of £10 billion as a result of its decision to cut National Insurance by 2p earlier this year, the remaining £7 billion loss came as a shock. Officials said the deterioration in the public finances had been driven by a perfect storm of the rising cost of servicing the national debt, fuelled by high interest rates, and lower than expected inflation figures leading to reduced income from taxes.
In three successive reports (Feb 20 and 28 and on March 1) the OBR slashed his headroom even further. Those forecasts prompted a scramble within Downing Street to raise enough money for tax cuts.
Mr Sunak is under massive pressure from all wings of his party to reduce the record high burden on working families amid woeful poll ratings which show the Tories could be reduced to a rump of just a few dozen MPS at the next election. The Prime Minister is said to have initially favoured a more impactful 2p cut to income tax, which he felt voters were more likely to notice in their pockets, but the move was ruled out on the grounds of both expense and the risk it would be inflationary.
Instead, the Chancellor pushed heavily for another 2p reduction in National Insurance, arguing that it was better targeted at those who are working and would help boost growth and job creation by slashing the cost of hiring new staff for businesses.
Mr Hunt had by this point already taken the separate decision to freeze fuel duty for another year, an all but inevitable choice given the cost of living crisis facing families.
But faced with those grim OBR reports, Mr Hunt realised he was going to have to raise cash to pay for those measures. Officials were put to task brainstorming a series of revenue-raising ideas, including the windfall tax extension which so angered Mr Ross.
Other proposals included abolishing the non-dom status – pinching a key Labour policy in the process – bringing forward a new vaping levy, hiking air passenger duty for travellers in business class and scrapping tax breaks for owners of holiday lets.
As was inevitable, the Chancellor also faced a slew of demands from different groups of MPS with competing priorities. At a meeting last Monday the 100-strong One Nation Caucus of moderate backbenchers grilled him on stealth taxes and housing.
Meanwhile, the Right-wing Growth Group urged him during its own faceto-face talks to prioritise reforms to inheritance tax, stamp duty and taxes on the self-employed.
George Freeman, a former science minister, set up a new 50-strong Tory group on the eve of the Budget to push Mr Hunt to do more for rural voters facing sky-high energy bills.
It will undoubtedly be a relief for the Chancellor when he finally steps up to the Despatch Box this afternoon to deliver a Budget on which, senior Conservative MPS have warned him, the party’s future electoral prospects could well rest.