Rishi Sunak risks clash with MPs by using Budget to pave way to tax hikes

Chancellor Rishi Sunak has set himself up for a clash with Conservative backbenchers by signalling that next week’s Budget will start the job of repairing the damage to public finances done by the coronavirus pandemic.

Mr Sunak’s comments will fuel expectations of a hike in corporation tax in his 3 March statement, alongside other potential cash-raising measures like freezing income tax thresholds to push more workers into higher bands as their pay rises.

But Tory MPs in the so-called Red Wall seats in the Midlands and North won from Labour in the 2019 election have warned that tax rises must be deferred until economic recovery is under way, with the chancellor focusing instead on investment to get people back to work.

Barrow and Furness MP Simon Fell said backbenchers were ready to be “an absolute nightmare” for the chancellor by demanding resources for their constituencies, while Carlisle’s John Stevenson said it was “too early” for tax rises while the £20-a-week uplift to Universal Credit should be kept for as long as a year.

Downing Street has said that votes on the Budget package will be regarded as a confidence issue, with chief whip Mark Spencer warring MPs they could be thrown out of the parliamentary party if they rebel.

In a pre-Budget interview with the Financial Times, Mr Sunak said that he wanted to “level with people” about the state of the nation’s public finances, with state debt above £2 trillion for the first time in history, equivalent to an entire year’s GDP.

“There are some people who think you can ignore the problem,” said the chancellor. “And, worse, there are some people who think there isn’t a problem at all. I don’t think that.”

Mr Sunak has faced pressure to allow borrowing to continue at a time when interest rates are at historic lows.

But he made clear he was sensitive to the risk that after a decade of low interest, the UK is exposed to relatively small hikes in rates.

A rise in 10-year UK government borrowing costs by half a percentage point over the past month has already sparked concern at the Treasury. 

And Mr Sunak said a further hike of just one percentage point across all rates would add £25bn to the annual cost of servicing the debt.

“Because we now have far more debt than we used to and because interest rates . . . at least a month or two ago were exceptionally low, that means we remain exposed to changes in those rates,” the chancellor said.

“That is why I talk about levelling with people about the public finances and our plans to address them.”

The chancellor will use his Budget statement to make the case for “honesty” with voters about the consequences of deploying £280bn of borrowed money to prop up the economy during the Covid-19 outbreak.

“All of us as Conservative MPs … are elected by the British people because people trust us with the nation’s public finances, they trust us with their money, they trust us to run the economy responsibly,” he said.

“I stood up at the beginning of this thing and said I will do whatever it takes to protect the British people through this crisis and I remain committed to that,.

“We went big, we went early, but there is more to come and there will be more to come in the Budget. But there is a challenge and I want to level with people about the challenge.” 

With Boris Johnson’s commitment to a “levelling up” agenda of big-spending investment in major projects and Mr Sunak signalling that he wants to back jobs and apprenticeships and offer support to start-up companies, it looks likely that big business will bear the brunt of early moves to bolster Treasury revenues.

Reports that the chancellor will announce a gradual rise in corporation tax from 19 to 23 per cent have achieved the unusual result of uniting Tory MPs with Labour leader Sir Keir Starmer in opposition to a tax hike on business - though shadow chancellor Anneliese Dodds clarified that Labour’s position relates to rises in the immediate future.

Mr Stevenson said that Tory MPs were looking for “continuing support for the economy, for families, for business” in the Budget, adding that now was not the time for tax rises.

“I just think this is too early right now, we’ll have a much better idea in the autumn,” the Carlisle MP told BBC Radio 4’s Today programme. “Everybody talks about tax and spend (but) the way out of this is actually to grow the economy. 

“If we have a faster growing economy, a lot of the problems that we are talking about might become far smaller.”

Arguing for the extension of the UC uplift for six to 12 months, Mr Stevenson said: “We’re not through the pandemic yet, we’ve still got a few months to go through. We want to see that continuing support, and we’ll probably have a much better idea of where the economy is come the autumn.”

Mr Fell said that Mr Sunak can expect pressure from Northern MPs for more investment in their constituencies.

He told Radio 4’s Week in Westminster: “I think every backbench MP is an absolute nightmare for the chancellor. I was elected to represent a community that has felt like it hasn’t been invested in for a long time, as were a lot of my Red Wall colleagues.

“So obviously we are going to be banging the drum for more money to be spent intelligently in our communities.”