Conservative rebels gather ahead of Budget
With taxes expected to hit a 70-year high, Trussites urge Hunt to reward work without breaking the bank, writes Szu Ping Chan
Jeremy Hunt keeps telling everyone he gets it. The Chancellor wants to cut business taxes. He wants to raise living standards and make the UK the best place for entrepreneurs and innovators to thrive.
“Declinism about Britain is just wrong,” he told an audience of tech entrepreneurs in London last month.
And yet, to many on the Right of his party, all this amounts to little more than empty words.
As the Chancellor prepares to give a Spring statement geared towards boosting Britain’s workforce this week, some backbeckers are increasingly concerned that policy is moving in the wrong direction.
Next month, corporation tax will rise for the first time since Labour chancellor Denis Healey was in office in 1974. Living standards are on course to suffer the biggest fall on record. And Britain’s innovators and businesses are already fleeing, with chip-maker Arm snubbing the London market and others threatening to go to the US.
A month ago, a group of former Trussites banded together to form the Conservative Growth Group (CGG). The 50-strong band of low-tax Tories is lobbying Hunt to cut red tape and be bolder with policies that they believe will stimulate investment and growth. For now, they are asking politely. “We’re not in the business of issuing threats,” says Sir John Redwood, a member of the group’s steering committee. “We are trying to work with Rishi Sunak and Jeremy Hunt because they are our leader and Chancellor – at the moment we wish them well.”
Yet the size of the group means the threat of any future rebellion cannot be dismissed out of hand by Downing Street.
Can Hunt throw enough red meat to the right of his party to head off a rebellion on growth and tax?
Led by Simon Clarke, the former levelling up secretary, and Ranil Jaywardena, the former environment, food and rural affairs secretary, the CGG presented a plan to the Chancellor consisting of timely and targeted measures that they say will reward work without breaking the bank. Sir John says: “We’re putting forward a series of good suggestions.”
The CGG held an audience with Hunt a fortnight ago that was described as “very positive” by one person, who added: “We can’t fault Jeremy as a person. We wouldn’t do that. He’s been very open and happy to discuss with us variously as group members.”
But while there were pleasantries aplenty, the challenge facing the country remains huge. The tax burden is on course to hit a 70-year high. The UK may dodge a recession thanks to a stronger performance in January, but growth is likely to remain anaemic for years.
The CGG’s dossier focuses on three main areas where they believe targeted action can help to boost growth rates.
The first is reform of what they’ve branded the “doctor’s tax”. The CGG says doctors have taken early retirement because pension rules aren’t fit for purpose. An extremely complicated NHS system, combined with a tapering
‘There’s a huge amount on the line here. The future of the country, people’s prosperity’
that reduces pensions relief from £40,000 of contributions each year to as low as £4,000 in some cases, has left some doctors facing what the Institute for Fiscal Studies (IFS) describes as “ludicrously high marginal tax rates’’ if they take on any overtime. In effect, it discourages people from working.
The so-called lifetime allowance – or the maximum amount you can draw from pensions without paying extra tax – has been slashed under the Tories from £1.8m to just over £1m today, meaning people with large pension pots and still working can face huge tax bills for continuing to top it up.
Rather than risk a nasty letter from the taxman, many opt for early retirement.
The Government’s own analysis shows that the number of GPs accessing their pensions early climbed from 19.9pc in 2008 to 40pc last year.
The CGG believes these pension policies need to change.
“We have to improve the NHS here, not by just throwing more money at it, but actually encouraging more doctors to stay longer,” says one CGG member. “It’s great that we’re training new doctors, but it’s expensive, and it takes time. And if we want to cut backlogs, we also have to stop them from retiring.”
Another policy on the CGG’s shopping list is getting rid of rules they claim make companies too scared to employ the talent they need. The group wants to scrap changes to so-called IR35 legislation, which was initially designed to stop contractors working as “disguised employees” by taxing them at a rate similar to full-time staff.
Critics say reforms in 2017 and 2021 have made bosses so nervous that many now avoid hiring contractors altogether. The changes put the burden of responsibility on the company to suss out who is really self-employed.
“Some of the big banks are refusing to take on contractors now, because they’re worried they’re going to be the one penalised, which is the state of play under the law,” says one CGG member.
The third and biggest bone of contention is business tax. Many in the group are resigned to the fact that the headline rate of corporation tax will rise to 25pc within weeks, from 19pc. The focus now is on how the Chancellor will get businesses investing.
It’s not just backbenchers and CGG agitating on this issue. Kemi Badenoch has told the Cabinet that lowering the cost of doing business must be a priority. The Business and Trade Secretary is lobbying to reduce regulations and taxes, though sources close to the Secretary of State insist she respects that decisions on taxes are for the Chancellor to make.
The CGG are likely to get some of their wish list, if not all. It is understood that Hunt will introduce measures to keep more NHS doctors in work by tweaking pension rules, while there will also be tax incentives for business.
Changes to rules for self-employed workers are less likely, sources say. After all, Hunt reversed his predecessor Kwasi Kwarteng’s decision to repeal IR35 reforms only three months ago.
Beyond this week’s budget, CGG members are increasingly frustrated by the forecasts produced by the Office for Budget Responsibility (OBR), the Government’s tax and spending watchdog.
“I mean, who are they?” says one member. Several members highlighted how forecasting errors have handed Jeremy Hunt an extra £30bn this year that he didn’t have just three months ago.
In fairness to the independent body, much of the extra cash is a result of a drop in energy prices, which are volatile and difficult to predict. However, another big chunk comes from stronger tax receipts that are likely to carry through into future years.
Members are annoyed that the OBR’s economic models do not in their view fully factor in the dynamic effect of tax cuts. In other words, they put more emphasis on how tax cuts reduce Treasury revenues than boost growth. Even Hunt is privately frustrated about this, although sources close to the Chancellor insist he respects the OBR’s judgement.
Others are less complimentary: “The problem with the OBR’s forecasts is that they’re always wrong,” complains a CGG member, “They only look at the next five years. And the only thing we know about that is they’re bound to be wrong.”
Even some economists agree. Stephen Millard, deputy director at the National Institute of Economic and Social Research (Niesr), says the Chancellor’s obsession with meeting tax and spending goals has stopped him going for growth.
“The Government spends too much time worrying about fiscal targets and not enough time thinking about what policies are actually doing,” he says.
Hunt is using OBR forecasts “as an excuse” not to do more, Millard claims.
The stakes are high. Sir John says the Government can’t afford not to act.
“There’s a huge amount on the line here. The future of the country, people’s prosperity, whether we’re going to make a great success of our potential freedoms.
“In order to compete in a world where US president Joe Biden is going for enormous protectionism, and where the EU is a very protectionist body, we need our own distinctive policy. The whole world is going to provide more for itself country by country. And so we’ve got to do it for ourselves.”
A failure to act may also be tantamount to political suicide. One CGG member says: “My personal fear is that if he doesn’t make significant moves to go for growth this time, which does not seem likely, then it’s just going to be too late for us to deliver positive news on the economy before the election.”
Sir John is reserving his judgment for after the Budget on March 15. “I’ll do what I always do,” he says with a wry smile.
“I try to give my colleagues the benefit of the doubt. And I always avoid personal criticism.
“But if I don’t think they’ve come up with the right answer, I’m sure you will hear from me.”