When he delivers his Budget just 27 days after becoming chancellor, Rishi Sunak will be aware that first Budgets often tell us a lot about those who deliver them. Geoffrey Howe cut taxes in 1979, while George Osborne raised them in 2010.
Sunak’s instincts on 11 March will be to reduce taxes, but events may force him to raise them, or at least prepare the ground for that later this year. Boris Johnson’s allies talk of getting unpopular decisions out of the way this year, in the hope voters have forgotten them by the next election. There is little doubt in Whitehall that Johnson will call the shots in this Budget, after Sunak swallowed No 10 taking control of the process, through a joint Treasury-Downing Street economic unit, which Sajid Javid found too unpalatable.
Johnson will not want to miss an opportunity to ease the fiscal squeeze Javid persuaded him to accept at the election. Its result has increased the pressure to spend more, to help the Tories retain their new seats in the north and midlands.
Like Javid, Sunak is a fiscal conservative. I would expect him to retain the language of fiscal responsibility (for use against Labour later) while relaxing his predecessor’s rule to balance the budget for day-to-day spending on public services within three years. The Tory manifesto provides a little wriggle room; it promised that the party would not borrow for such spending, but did not include Javid’s timetable. So Sunak could make it five years instead of three.
Yet such tweaks will not satisfy Johnson’s spending appetite. Some tax rises will be necessary, as the Institute for Fiscal Studies and Resolution Foundation think tanks warned this week.
Sunak is constrained by the manifesto’s pledges not to raise the rates of income tax, national insurance and VAT, though he could freeze some allowances. Treasury officials worry about funding proposed national insurance cuts in future years. There is always scope for closing loopholes, and the chancellor will probably do that on inheritance tax and entrepreneurs’ relief.
This is the low hanging fruit. The big juicy apples Johnson wants will require tough decisions. But wherever Sunak looks, he runs into opposition from Tory MPs – over cutting tax relief on pensions for high earners, ending the freeze on petrol duty or imposing higher council tax bills for the most expensive homes. Despite No 10’s apparent desire to pick fights, the chancellor might not want an early one with his own party. He might announce a review of green taxes, including fuel duty, without ending the freeze immediately. He might even do the same on the taxation of pensions and property. “Consultation exercises” are a useful Budget trick: they set a direction of travel, test the water and allow the government to back off if the temperature gets too hot.
So, with a second Budget and government-wide spending review coming this autumn, Sunak might be tempted to put off difficult decisions for another day.
He could use next month’s Budget to signal other long-term changes, such as reviving high streets by replacing business rates with a tax on land value rather than buildings. Another idea in his in-tray is a shake-up of planning rules to allow more housebuilding, which enjoys strong support in No 10.
Just before becoming Johnson’s housing adviser, Jack Airey co-authored a report for the Policy Exchange think tank proposing a zonal land use system. Councils would still draw up local plans, but once an area had been earmarked for building, the authority would not rule on individual planning applications. This would tackle nimbyism, land banking by developers and help smaller housebuilders enter the market, Johnson aides believe.
Decisions on tax and planning go to the heart of the government's dilemma: will it upset traditional Tory voters in the south to boost the party's chances of retaining their new voters in the north? Tax rises and fears of building on the green belt would alienate some supporters, but do they have anywhere else to go?
The problem for Johnson and Sunak is that shiny new bridges, new roads and eventual new rail links might not be noticed by the next election. The state of public services and the cost of living will have much more impact on people’s daily lives.
For all the talk of ending austerity, the Tories will have to reverse some of the cuts they have made since 2010 to make a real impact in the poorest regions. There was a powerful reminder in the study by Michael Marmot, director of the UCL Institute for Health Equity, which found it very likely a decade of austerity had widened health inequalities, with life expectancy stalling for the first time in a century.
According to the Resolution Foundation, cuts in the pipeline to means-tested support for low-income families will eventually leave around 3.2 million households £550 per year worse off, while the two-child limit in means-tested benefits will eventually see about 750,000 households lose an average of £3,600 a year.
This Budget will generate lots of headlines about “levelling up” the poorest regions. But will the Tories really be prepared to hike taxes for the rich by enough to level up the public services in those regions? I rather doubt it.
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