Britain risks more tax rises as Sunak seeks to rein in big-spending Boris

Sunak

Rishi Sunak risks being forced to impose another tax raid on Britain as he prepares to draw up fiscal rules designed to rein in the Prime Minister’s spending plans.

The Chancellor is set to impose new borrowing rules in next month's Budget to bring down the debt as a share of GDP and balance day-to-day spending within three years.

It raises the risk that families and businesses will face new tax hikes to pay for any big new spending plans, of the type favoured by the Prime Minister, or if the economy slows down leaving the Treasury short of revenues.

James Sproule, a former Downing Street adviser and now chief economist at Handelsbanken UK, said: “Tax rises do look inevitable in the medium term” due to pressures to spend more on health and social care. The relatively weak rebellion from Tory backbenchers over the tax rises that have just gone through says that this will be the preferred option.”

An ally of the Chancellor told The Telegraph that reinstating the rules, which were first laid down by Sajid Javid as part of the Tory manifesto, were his attempt to “put down a marker” and reassert his grip over public spending.

While a number of Treasury figures have privately expressed frustration during the pandemic at what they see as Mr Johnson’s profligate spending, the source suggested Mr Sunak had achieved a number of victories in recent weeks, including the national insurance hike.

“I think the Treasury is in complete and utter control and I think you saw that with the tax change a couple of weeks ago,” they added. “The chancellor since the end of last year has been worried about interest rates and inflation going up. The debt situation is his big concern and he’s also thinking about the need to have clear blue water between him and Labour.

Silvia Dall’Angelo, economist at Federated Hermes, said the combination of health and social care pressures along with investment plans and net zero proposals could cost more than currently anticipated.

“The Government has this very ambitious plan and it looks like it is choosing a fairly hard way to fund it with higher taxes down the road,” she said.

While the public finances appear to be on the right track now as the economy recovers rapidly, Tom Clougherty, head of tax at the Centre for Policy Studies, warned that a slowdown could put Mr Sunak under pressure.

“The danger would be that we have a weak recovery, that tax revenues do not bounce back the way you would expect, then even in spite of higher tax rates you might not get enough revenue coming in,” he said.

“There is a danger of a vicious spiral where the economy is not growing so you have a deficit, so you raise taxes - but that just depresses the economy even more and that gap stays the same or maybe it even grows.”

Earlier this month Mr Sunak hiked national insurance taxes for workers and their employers, and in the March Budget he announced corporation tax would rise from 19pc to 25pc in 2023.

Mr Cloughterty said the Chancellor any more “probably would be counter-productive at this point.”

The Institute for Fiscal Studies director, Paul Johnson, said the Chancellor’s planned fiscal rules were “very tight”, adding: “It means no borrowing to fund day to day spending and leaves very little scope for manoeuvre in the spending review.”

Nigel Morris, tax director at accounting group MHA, said income tax rates for higher earners could be tweaked, while the £2,000 annual dividend allowance could be scrapped to raise more cash.

The new borrowing rules, first reported by the Financial Times, would aim to bring the public finances into line by 2024-25, roughly in time for the next election.

Both Downing Street and the Treasury have insisted that no decisions had been taken, with one source citing the uncertainty over Covid heading into the winter.

“At the March budget we explained the government intends to set out these rules later in the year provided economic uncertainty recedes further,” the Prime Minister’s spokesman added.

Reimposing the fiscal rules would also help to neutralise any challenge to Mr Sunak’s strategy for balancing the books from competing centres of power in the Cabinet, insiders said.

The chief among them is Liz Truss, the new Foreign Secretary, who is known to have privately voiced scepticism about raising taxes to pay for social reform.

A former Chief Secretary to the Treasury, Ms Truss is understood to have suggested that borrowing to pay for the reforms would have represented a better option than breaking manifesto commitments on tax.

However, when challenged at the Cabinet earlier this month, Mr Sunak is said to have told those present that he would be “genuinely shocked if anyone thinks the answer to the question is more borrowing”.