Hunt’s do-nothing Budget might just win the Tories the next election

‘Doing politically unpopular things in the run up to an election takes guts’

Don’t expect fireworks from next week’s spring Budget. Head-turners are off the menu. We had quite enough in the way of pyrotechnics from Downing Street’s last two occupants, Liz Truss and Kwasi Kwarteng. Another burst of it is the last thing a still shell-shocked economy – and the Conservative Party – need right now.

Rather, the priority must continue to be the hard yards of winning back the Government’s reputation for economic competence. Tax cuts have to be earned and sadly we are not yet there.

With the general election little more than a year and half away, this fiscally hair-shirted approach would nevertheless seem to be quite a gamble as a political strategy. Financial markets may celebrate the pursuit of economic stability and sound money, but is a do-nothing Budget enough to win an election?

Perhaps surprisingly, it might be. Internal Conservative Party polling suggests that on the question of who’s best to manage the economy, the Government is once again level pegging with Labour, having been more than 20 points down after the disaster of last September’s mini-budget.

If an accurate picture of what voters really think, it’s quite a turnaround and suggests that the lasting electoral damage from the mini-budget debacle wasn’t quite as bad as feared. The bet is that voters will reward a pragmatically minded, technocratic government that, in a calm and considered manner, aims to do the right thing by the economy, even if it does involve a degree of low-growth pain in the meantime.

With a still less than convincing Opposition, it may even work. For now, at least, the chips seem to be falling Rishi Sunak’s way. Few would have believed it, even a couple of months ago, when gallows humour was the order of the day among grimly dispirited Tory backbenchers.

Let’s start with corporation tax, where hopes are high in some quarters that, after a slight improvement in the public finances, the Chancellor will next week reverse course and go back on the plan to raise the rate from 19pc to 25pc. This, I’m afraid to say, is wishful thinking. Sunak has already seen down his rebellious MPS on the Northern Ireland Protocol and he is seemingly determined to see them off on corporation tax too.

Is this entirely wise, given the current exodus of capital and business investment from these shores? Again, the bet is that the economy can take it. Despite the hoopla from business lobbies, the tax hike is not as big a deal as it seems, even if the signalling is admittedly terrible.

In terms of the overall tax burden on business, the increase doesn’t affect the overall rankings very much. The headline rate is not the same as the effective rate, which after allowances will be considerably lower for the bulk of companies. In any case, Britain will remain the second lowest for business tax in the G7 after the US.

When George Osborne was chancellor, he received plaudits for repeatedly reducing the headline rate of corporation tax, but it was really just a case of smoke and mirrors, with the apparent giveaway clawed back via reductions in allowances. If the shambles of Trussonomics taught us anything, it is that you cannot do tax cuts via borrowing. To be sustainable, they have to be earned. No business will take them seriously if it is thought they will only have to be reversed in a few years’ time.

Those who argue that the Government should forgo the £18bn a year the corporation tax increase will raise – equivalent to 3p on the rate of income tax – must first answer where else the money is going to come from.

If it’s spending cuts, the Government is already reducing its outgoings by £30bn a year relative to previous plans. In the meantime, the queue of worthy applicants for taxpayer pounds, from defence spending to new nuclear, battery factories and the energy transition more widely, just keeps on growing.

To make meaningful inroads into spending, you need to take the axe to really big budgets, namely healthcare, pensions and welfare. This may or may not have its merits, but woe betide the government that acts on it while reducing the tax burden on business.

Clutching at straws, the no-increasein-corporation-tax lobby insists that the so-called super-deductions regime designed to boost investment after the pandemic should be made permanent. This would indeed be good, yet to do so would cost around two thirds of the amount the increase in corporation tax is expected to raise. It’s not a credible alternative, even if there is plainly scope for less costly mitigation than the full monty of extending the superdeductions regime.

As it is, the Chancellor is hoisted on the petard of his own fiscal rules. These are already looser than any chancellor has applied since Gordon Brown first introduced the notion of running the public finances according to a prescribed set of constraints.

All that is required of Hunt is for debt, as assessed by the Office for Budget Responsibility (OBR), to be falling as a percentage of GDP in five years’ time, and he’s home and dry.

This would hardly seem much of an ask, yet even so, the Chancellor is right up against his own ceiling, with virtually no room for error.

You can complain all you like about the OBR’S downbeat assumptions for economic prospects in reaching this judgment. As one minister puts it, had the OBR been around at the time of Nigel Lawson’s decision to cut the top rate of income tax to 40pc, it would almost certainly have said this would be deeply damaging to tax revenues. In the event, the cuts did the reverse and increased the tax take. Persuading the OBR, the Treasury and the markets of the dynamic effects of supply-side measures such as changes in taxation is very much a work in progress.

Yet for the moment, the Chancellor simply cannot afford to have the OBR say that he’s broken his own fiscal rules. Even if he doesn’t believe in the OBR’S assessment, his path back to economic stability demands that he just sucks it up. Another violent lurch up in market interest rates would sink the Sunak administration just as comprehensively as it did that of Truss.

Whatever you might think of the OBR’S forecasts for economic growth, the public finances remain in a highly perilous state; after three economic shocks in a row, it wouldn’t take much to tip them into some kind of doom loop.

Economic stability and fiscal conservatism are two halves of the same coin, and an essential precursor to renewed productivity and investment growth. Whether it is also a formula for re-election remains to be seen.

Doing politically unpopular things in the run up to an election takes guts, but it’s just possible that common sense will prevail and the Tory Government’s latest incarnation will get the credit for it.