An Emboldened Rishi Sunak Gets Ready to Fight His Own Party Over Taxes

The prime minister has started to deliver on his promises to voters. Can he keep it going until the next general election?
Rishi Sunak and Ursula von der Leyen during a joint news conference on a post-Brexit deal in Windsor, UK, on Feb. 27. Photographer: Chris J. Ratcliffe/Bloomberg
Rishi Sunak and Ursula von der Leyen during a joint news conference on a post-Brexit deal in Windsor, UK, on Feb. 27. Photographer: Chris J. Ratcliffe/Bloomberg

UK Prime Minister Rishi Sunak wants to use his deal with the European Union on Northern Ireland to cement a reputation for competence and delivery. Several members of his cabinet are instead hoping it will mark a return to traditional Tory tax cutting. 

With less than two weeks to go before the March 15 budget, an improving picture in the public finances is encouraging senior ministers to step up pressure on Chancellor of the Exchequer Jeremy Hunt. 

Two cabinet members in recent days have floated the idea that Hunt should either scrap or curtail a planned rise in corporation tax. A third, Business Secretary Kemi Badenoch, has privately indicated she wants to see the main rate cut, according to people briefed on those conversations, though she is also lobbying the chancellor on other mechanisms to reduce costs for businesses.

Ditching the plan to raise corporation tax from 19% to 25% would be a big ask for the 42-year-old prime minister. It was a totemic policy from his time as chancellor and his commitment to balancing the books was key to ending the market turbulence that brought down his predecessor Liz Truss last fall. 

Yet he also knows that finding a way to start bringing down a record tax burden would help to win round his opponents on the right of the party and boost his chances of surviving a general election due in less than two years’ time. 

Getting rid of it entirely would cost some £18 billion per year. Better economic prospects mean Hunt has more money to play with, but only around an extra £10 billion, according to economists.

A person familiar with Hunt’s thinking said the chancellor does want to prioritize business tax cuts before the election but is concerned that doing so now risks fueling inflation. Hunt will cut tax for business once inflation is under control and public finances are secure, they said.

Even if he sticks to the increase in corporation tax, there’s plenty that Hunt can do for business which will please his cabinet colleagues. One cabinet minister said that if he’s unable to budge on the main corporate tax rate, Hunt should provide incentives for greater investment in the UK.

This could come through an expansion of business investment relief, or a replacement for the “super-deduction,” which allows firms to reduce their tax bills if they invest in certain assets. That is due to expire this month.

In talks with the Treasury in the last few weeks, business lobbyists have proposed increasing the threshold at which firms pay the new 25% top rate, taking smaller businesses out of the higher bracket. They have also discussed “vouchers” to drive investment in green industry.

Labour’s Massive Lead

An internal debate about cutting taxes might actually help put Sunak’s Conservative party on the road to something approaching normality after years of bitter internal divisions over Brexit. At an away day this week for Tory Members of Parliament, held at the same Windsor hotel where Sunak announced his Brexit deal, attendees described a boost in morale.

Party strategist Isaac Levido gave a presentation where he argued the next election was not yet lost as there are large numbers of voters yet to make a decision on who to back, according to someone who was present.

Only 10% to 15% of 2019 Tory voters have resolved to vote Labour and over 20% are undecided, Levido told MPs, while some 17% of people who are currently not planning to vote prefer Sunak to opposition Labour leader Keir Starmer.

The bigger picture is that the Tories are still 23 points behind Labour in the latest YouGov opinion poll. But given the party’s tribulations over the last 12 months, this week’s successful landing of the Northern Ireland “Windsor Framework” — which so far hasn’t led to an existential clash with Sunak’s hardline Brexiteer critics — gives the prime minister something to build on, according to his supporters. 

One argued that it demonstrates his ability to deliver against the odds.

Sunak’s allies told MPs at the away day they would focus on “four Bs” over the coming weeks to produce a more positive story about his government: Brexit, Biden, the budget and boats.

Boats is a reference to the flow of undocumented migrants crossing the Channel from France in small vessels. Sunak has pledged to significantly reduce their numbers before the next election and is due to publish imminently draft legislation that will give the government new powers to tackle the problem. 

The issue will be high on the agenda when Sunak meets with French President Emmanuel Macron in Paris on Friday but it’s another topic where the prime minister’s ability to keep right-wing Tory backbenchers onside will be put to the test. Rank-and-file MPs are preparing amendments that would propose taking Britain out of the European Convention on Human Rights and that could cause Downing Street a headache as officials look to rebuild their relationship with the European Union.

Sunak will also travel to the US to meet President Joe Biden this month. The UK government hopes Biden will also come to the UK soon now the Northern Ireland deal has been secured, people familiar with the matter said, not least because they would expect such a visit to bring billions of dollars of investment from US firms.

But first there is a budget to navigate and tax isn’t the only issue where Hunt will need to manage the competing appeals of ministers. 

The chancellor is set to protect Britons from rising bills by maintaining the government’s energy-price guarantee, which caps average household bills at £2,500, for another three months, according to a person familiar with the matter.

Unfinished Business

There is also increasingly vocal cabinet jostling for more departmental spending. Defense Secretary Ben Wallace wants some £10 billion so military spending keeps up with inflation. Health Secretary Steve Barclay has entered “intensive” talks with the nursing union over pay.

“The messages of fiscal responsibility will absolutely continue through budget and beyond but also that critical message of hope,” treasury minister Victoria Atkins said in an interview this week.

And there’s also unfinished business over Northern Ireland.

While the mood in Number 10 is certainly bullish following the agreement with the EU, it will be difficult for the Democratic Unionist Party to endorse the Brexit deal outright, a person familiar with their thinking said. Their verdict will decide whether Sunak manages to restore power sharing in Northern Ireland or sees the yearlong impasse drag on. 

Early indications from lawyers for the hardline pro-Brexit MPs are that they will also be critical of aspects of the agreement, according to someone briefed on their discussions. 

As a result, Sunak’s team been talking about avoiding a straight vote on the whole deal and instead finding another mechanism for Parliament to express its view.

Hardline Brexiteers are nonetheless depressed at the seeming inevitability of the agreement passing relatively easily. One said the promise of divergence from Brussels rules was dying and it was inevitable the UK would end up aligning more closely with the EU over the next decade, first under Sunak and then if Labour wins the next election. That residual unhappiness could still lead to rebellions on issues like tax and immigration in the months ahead, the person predicted.

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