Are the Tories really going to cut taxes – and will it do them any favours?

It’s an election year, and therefore one in which the voters will be invited to believe in the unbelievable – such as radical, pain-free tax cuts while the economy is wobbling towards recession, debt remains dangerously high, and public services are being starved of funding. The chancellor, Jeremy Hunt, is putting it about that he has so much to give away to taxpayers, he’ll need two Budgets to fit it all in.

Hardly a month will go by without those famous “hardworking families” of Britain enjoying a boost to their take-home pay, or at least a promise of it after a Tory election win. The pre-election boom and the cynically timed tax cut constitute an old political ruse, but the Tories, who’ve been at this game since at least the general election of 1955, will hope it can still do the trick. Voters, after all, have notoriously short memories.

Put it this way: compared with their grasp on NHS waiting lists or the small boats crisis – or even the economy more broadly – Rishi Sunak and his chancellor do have much more control over the public finances, and they’ll make the most of it. With the full power of the Treasury at their disposal, and an economy that is at least stable (or rather, stagnant), they ought to be able to contrive some form of tax cut this year – real or merely pledged, illusory or temporary. It’s their best shot.

In short – and by “cut”, we mean raise them by a bit less than originally planned – he could do this by exaggerating how well he’s going to hold back public spending, by way of efficiency savings and the like.

Hunt will only be able to balance the books by assuming that real-terms public spending will have to reduce in future years, so that while inflation inflates most tax revenues, public spending is left more or less frozen. That is a heroic assumption, if not a foolhardy one – and the recent crises in various public services, along with strikes over pay and a spate of bankruptcies among local authorities, suggest that it cannot hold.

The unrealistic presumption that public spending can be squeezed indefinitely, after a previous decade of austerity, also helps Hunt to (just about) hit his target of reducing borrowing and the national debt as a percentage of national income. Unlike prospective tax revenues, economic growth is the one major economic variable that the Office for Budget Responsibility cannot make an independent judgement on and has to accept as a politically decided given.

It feels like the public are increasingly fiscally literate, so they may well see what Hunt and Sunak are up to – a crude series of pre-election bribes designed to put the phrase “tax cuts” into the news headlines and put Labour on the defensive.

Such has been the scale of tax rises in recent years – leading to the heaviest burden on the economy overall since the Attlee era – that people are increasingly sceptical. Labour’s message, which seems to be cutting through, is that with tax thresholds frozen until 2028, the Tories are only offering a small discount on much higher overall personal taxation – particularly if hikes in council tax and the squeeze on in-work benefits are accounted for.

The earth, if it might get the Tories a fifth term – and, as an outside possibility that must haunt him, save the chancellor’s own parliamentary seat in Surrey. It is a long time (if indeed it has ever happened) since a chancellor of the Exchequer lost their own constituency, and it’s not how Hunt would wish to be remembered. If he did engineer such a miraculous turnaround in his party’s fortunes, it might even revive his own leadership ambitions. (Well, he’d deserve something, surely?)

Unaccountably, given how few people pay it, some hefty reductions in inheritance tax would be disproportionately popular among people who are unlikely ever to see a million-pound inheritance (which is the effective rate for most families, given generous exemptions).

Other crowd-pleasers would be yet another freeze on fuel duty, leaving alcohol duties where they are, and some kind of symbolic reduction in stamp duty for homebuyers. The smart thing would be to make these effective in 2025, and thus contingent on the Tories winning the next election – a fairly naked bribe.

The real challenge for Hunt would be to raise the tax thresholds at last, which would deprive his Labour critics of one of their best lines of attack. That, and cutting the basic rate by one percentage point, would restore Tory morale, and could win some votes at least. The downside is that it takes a huge risk with funding public services in the future – a ticking fiscal time-bomb that Rachel Reeves would have to try to defuse.

The spring Budget is on 6 March, and it will continue the narrative – set last autumn with the national insurance reductions – around the Tories’ “direction of travel”. Inflation should be coming down, albeit more slowly, and there’ll be more talk about cuts in mortgage rates. Some might expect some action at that point.

The party’s October conference would be a pre-campaign rally, with a generous autumn statement/second Budget to follow, and – perhaps the very next day – the long-awaited announcement of a general election in early November. It would give the Tories a much-needed sense of momentum and excitement, bogus as that could turn out to be.

Such has been the collapse in the Conservatives’ reputation for economic competence that they are not going to regain it inside one year. For comparison, their recent peak opinion poll rating as the party most trusted to run the economy was back in March 2020 – at 47 per cent vs just 14 per cent for Labour. At that point, Sunak was chancellor and impressing folk with his pandemic response package. It drifted down from there, and of course crashed after the Liz Truss mini-Budget.

Sunak and Hunt have repaired some of the damage, but Labour now has a narrow two-point lead as best party on the economy – which happens to be the key electoral battleground. It isn’t all to play for, but Sunak and Hunt may be able to regain some ground and credibility on this issue, albeit at a cost of storing up fiscal trouble in future.