There are two Tory conferences simultaneously taking place in Manchester, within the same conference hall and inside the same fringe events. One is attended by elated activists, who are revelling in the December 2019 victory they never got to celebrate at party conference last year. The other is attended by increasingly agitated grass root faithfuls, who are up in arms about their party hiking taxes: especially the National Insurance rise on workers and employers, set to kick in next year.
Unsurprisingly, most ministers are tapping into the mood of the first group. They hail the success of the party on fringe panels and at drinks receptions. Yesterday evening, Michael Gove and Jacob Rees-Mogg both paid lip service to low taxes: not just the merit of keeping the taxman at bay, but the Conservative party’s reputation for doing so. Not everyone in the audience was convinced. ‘What does it say of our party’, one activist tells me, ‘if the Cabinet thinks this is what 'low tax' looks like?’
In today’s keynote speech, Rishi Sunak decided to tackle these frustrations within the party head on. In the Chancellor’s address, delivered on the main stage, Sunak didn’t claim the party was ‘low tax’ or always on the side of the taxpayer. Instead he made the case for the recent tax hikes, citing ‘fiscal responsibility’, as the conservative principle guiding him in the Treasury.
This has been a big theme in fringe session Q&As: the trade-off between the health of the nation’s finances and contents of the taxpayers’ purse. Sunak made clear he’s prioritising the former: tax cuts are desirable, he said, but not at the expense of borrowing further:
‘I believe in fiscal responsibility. Just borrowing more money and stacking up bills for future generations to pay isn’t just economically irresponsible, it’s immoral...anyone who tells you that you can borrow more today and tomorrow will simply sort itself out, just doesn’t care about the future.’
What Sunak didn’t mention in his speech was the more immediate effects of borrowing that play on his mind: with the Bank of England now forecasting inflation to peak above four per cent by the end of the year, the Chancellor is acutely aware that the smallest hike in inflation and interest rates could force him to find billions of pounds overnight to pay the government’s bills. The more he borrows, the higher the cost of the debt is to service: a painful reality for future generations indeed, but increasingly a risk for taxpayers now, if borrowing conditions were to spiral out of control.
Sunak’s pitch today is similar to Margaret Thatcher’s strategy when she first entered Downing Street. Shortly after becoming PM, Thatcher raised taxes at first (including VAT) in response to the crisis the nation faced, which at that time was soaring inflation. Her chancellor Sir Geoffrey Howe justified the decision as one of priorities, similar to Sunak's arguments around what the Covid crisis required. It wasn’t that the government didn’t believe in lower taxes. It simply couldn’t afford them right away.
But even if Sunak can convince the grassroots of his logic, there are still a myriad of problems to resolve. Thatcher’s tax hikes came with the explicit promise of cuts down the line, once inflation was under control. While Sunak made clear in his speech that he ‘wants’ tax cuts – only once finances are back on ‘sustainable footing’ – no similar promise has been made by his government to the public. If anything, there are questions as to whether taxes might rise further to increase funding for social care (the Prime Minister and Chancellor have refused to rule out further increases during party conference), as it seems nearly impossible that the NHS will give up the revenue from the NI tax hike that’s meant to clear the Covid backlog, when it’s supposed to do so in a few years’ time.
What's more, there is too much questionable government spending taking place for low tax enthusiasts to accept the premise that the only level left to pull was tax hikes. Even the £500 million announced by Sunak today to extend the jobs support scheme and its many programmes will raise eyebrows: with average wages up eight per cent on the year, and job vacancies at a record high of one million, it’s not obvious that extra funds to support people into work is the priority for an additional half a billion pounds of spending.
While it wasn’t said explicitly, Sunak’s speech today gave the sense that he is drawing a line under the emergency mindset. ‘Now is the time at last, at long last, he ended, ‘to finally turn to the future.’ That future, it seems, will be one of fewer giveaways and tough lines on tax. But it’s a future the Chancellor is willing to openly make the case for.