Earlier this year Jeremy Hunt, usually one of the most considered figures in the Conservative Party, surprised colleagues by appearing to throw caution to the wind.
He vowed to emulate Nigel Lawson, the tax-cutting chancellor whose radical economic policies led to the Big Bang in the financial markets. The subtext was clear — having cut taxes in the autumn statement, there was much more to come in the March 6 budget.
At the time Hunt had good reason for optimism. The Office for Budget Responsibility (OBR), the fiscal watchdog, was forecasting that the government would have as much as £30 billion to spend in the budget.
Lower government borrowing costs led to rampant speculation. The Tories were variously said to be looking at a 2p cut in income tax, another reduction in national insurance, slashing inheritance tax and extending child benefit to middle-income families.
Two months later and the fiscal picture has changed dramatically. A combination of a rise in the cost of government borrowing and lower tax receipts because of falling inflation means that the fiscal headroom now stands at about £13 billion.
Given that Rishi Sunak and Hunt have decided to keep £6 billion in reserve, it leaves relatively little room for significant tax cuts.
The spring budget on Wednesday, once regarded as a potential game-changer, is now being seen as an anticlimactic sequel to the autumn statement, in which Hunt cut national insurance by two percentage points. Nearly all the planned tax cuts have been shelved, leaving cuts to national insurance and an extension of the fuel duty freeze as the main expected giveaways.
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Even repeating the two-point cut to national insurance is likely to be challenging given the £10 billion a year cost.
“Treasury ministers aren’t just climbing down on tax cuts, they’re at the bottom of the valley trying to dig a tunnel underneath it,” one former cabinet minister said. “They’re all going round the tea room warning all and sundry not to expect much. I know the game is to talk things down — but with this lot that tends to be the reality as well.”
Instead Hunt has found himself having to turn to potential revenue-raisers as he seeks to find money for the cuts to national insurance.
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In doing so, he is expected to steal Labour’s clothing. Hunt is preparing to scale back non-dom tax status, one of Labour’s central pledges. It is not without political risk, given that the Tories have repeatedly warned that doing so could deter foreign investment. Sunak’s wife, Akshata Murty, also previously benefited from non-dom status.
However, there is political advantage. Labour was planning to use the £2 billion a year raised from scaling back the non-dom tax regime to fund several flagship pledges: free breakfast clubs for schoolchildren, hundreds of thousands of additional dental appointments and tackling NHS waiting lists.
Rachel Reeves, the shadow chancellor, who has put fiscal stability at the centre of her pitch, would be left with little choice but to abandon these pledges given her explicit support for cuts to income tax or national insurance. But while painful, Labour believes it is a price worth paying. “Trust is the only core thing that matters,” a Labour source said.
“Rachel has spent three years building her reputation as the prospective iron chancellor. This is desperate, fag-end-of-a-government kind of stuff. People vote on their gut. Their gut feeling is that they are worse off.”
The most difficult decision facing Hunt is over public spending. At present the government has set out plans to increase spending by 1 per cent overall from 2025, which economists have pointed out would lead to significant cuts in non-protected departments.
Hunt is weighing up whether to go further and increase spending by just 0.75 per cent, which would free about £5 billion for tax cuts. The political calculation is that Labour would have no choice but to back the cuts because it supports reducing taxes for workers. But the risk is that the Tories would be accused of returning Britain to austerity as part of a “salting the earth” strategy.
At the most senior levels of government, there is frustration with the OBR. One of the legacies of Liz Truss’s premiership is that the fiscal watchdog is now effectively sacrosanct. Truss’s decision to dispense with the OBR for her disastrous mini-budget was a significant factor in the market turmoil that followed.
But privately tensions are growing. One senior Tory said that the revised forecasts from the OBR were effectively “killing” the government’s plans, while another went further and suggested that it was a group of “left-wing economists” who were intent on “screwing” the Tories. Relations deteriorated further when Richard Hughes, head of the OBR, said that the government’s spending plans were “worse than fiction”.
There was particular frustration this week when the OBR downgraded some of the government’s central growth measures, leaving them with an additional £2 billion to find. “A group of twentysomethings from the Resolution Foundation have a veto on everything,” a government source said.
One official said that the prime minister was personally vetoing any proposal involving additional spending or investment even in areas such as helping first-time buyers, which many Tory MPs see as critical to winning back younger voters.
Despite very public pleas by Michael Gove to use the budget to make mortgages more affordable, officials say these have fallen on deaf ears. “There is basically nothing there on housing except on the margins,” one said. “He asked for a lot and it’s all been rejected.”
One senior Whitehall figure said Sunak’s tight control over the budget process was causing frustration.
“The joke among officials is that Hunt is the most impotent chancellor in history and can’t even spend £5 million without getting it signed off by No 10,” they said.
“Sunak has decided to bet the house on tax cuts — and is going through the spreadsheets line by line vetoing everything else. Every department asking for money is getting knocked back.”
George Osborne, the former chancellor, claimed this week that there were mounting tensions because No 10 was pushing for a cut in the headline rate of income tax but that this was viewed as inflationary. “This has been the source of a lot of conflict and debate and arguments,” he said on his Political Currency podcast.
However, some believe that the Treasury is deliberately playing down expectations and may have more money to spend than it is letting on. They suggest that it has closer to £20 billion to spend, which would be enough to pull off a 2p cut in income tax.
Privately some MPs are worried that the relentless focus on prioritising tax cuts over increases in public spending is not just a high-risk strategy but one for which there is little evidence of public support.
YouGov polling for The Times shows that 47 per cent of people think that further tax cuts are unaffordable — including 40 per cent of current Tory voters.
Asked what the government’s priority should be if there was “spare” money available, 55 per cent supported spending more on public services with only 30 per cent in favour of tax cuts.
Even among those who voted Tory in 2019 more favoured extra money for schools, hospitals and the police than backed tax cuts.
Some suspect the reason the two-point cut in national insurance failed to make a dent in the Tories poll rating was not because voters were not listening but because they were at best ambivalent towards the policy.
The worry is that with record waiting times in the NHS, pushing tax cuts over being seen to be sympathetic towards spending sends the wrong message to voters.
“The biggest joke is that Rishi is left-wing,” one former minister said. “I battled with him as chancellor to get money for some really important projects and the answer was always no. He is fundamentally and ideologically a low-tax, small-state Conservative.”
