The Conservatives must move away from a system that “feels like the taxman is breathing down our necks from cradle to grave”, Ranil Jayawardena declared.
Speaking at the Centre for Policy Studies think tank last week with Liz Truss cheering on from the sidelines, the chairman of the influential Conservative Growth Group said: “We should believe in tax cuts because helping hardworking families should be at the heart of the Conservatives’ plan for our great nation.”
Yet Jeremy Hunt took a very different view. Just hours after Jayawardena’s speech, he told a packed room of senior bankers that vanquishing inflation was more important than cutting taxes.
The Tory party is increasingly divided on tax, with the two factions centred on the last two prime ministers.
Those who favour cuts rally around Truss, who used her brief time as prime minister to announce ill-fated reductions. This camp argues that the burden on businesses and families must be reduced to get the economy growing again.
“There’s a big danger that we get into a vicious cycle where we have a big public borrowing bill because growth is low,” says Tom Clougherty, at the CPS think tank founded by Margaret Thatcher.
“And because of that, we can’t cut taxes and the tax burden keeps rising. And that itself weighs on growth. So the budget deficit gets bigger, not smaller, and the prospect of tax cuts recedes even further into the future.
“I think both economically and politically they can [cut taxes], and they really have to look at what they can do in the time that they have left to improve things.”
However, the current prime minister, Rishi Sunak, and his chancellor believe that tax cuts will only deepen Britain’s inflation crisis.
Discussions about promising to scrap inheritance tax are said to be “live” in Downing Street. However, this policy would only be a manifesto pledge to be enacted after the next election and would depend on inflation getting under control.
Paul Dales, chief UK economist at Capital Economics, says: “Recent events have probably reduced the fiscal headroom and reduced the chances of a big loosening in fiscal policy ahead of the next election.”
Official figures published this week are expected to show the headline rate of inflation fell to 8.3pc in the year to June, from 8.7pc in May. However, it will still be much higher than the Bank of England’s 2pc target.
Inflation has also come in higher than expected every month since March, raising the prospect of another overshoot in June.
Persistently high inflation has forced the Bank to raise interest rates to their highest level since 2008, with markets forecasting the benchmark could peak at 6pc.
Rising rates have sent the cost of servicing Britain’s £2.5 trillion debt pile rapidly higher.
Dales says the upward lurch in borrowing costs could leave the Government with just £2.5bn to spare if it wants to meet the already loose goal of ensuring debt falls in five years. The war chest had already dwindled to a record low of £6bn in March.
A sustained period of higher interest rates, combined with a higher post-Covid debt stock, would push debt interest costs from 4pc of gross domestic product (GDP) today up to what would be an all-time high of 13pc of GDP by the mid-2070s, the Office for Budget Responsibility warned last week. That’s £325bn in today’s money. Debt is also on course to balloon to 300pc of GDP as the size of the economy is dwarfed by the country’s total borrowing mountain.
Sunak’s pledge to halve inflation from 10.7pc by the end of the year now looks in serious doubt. The promise was made when the Bank of England predicted the rate would plummet rapidly.
However, inflation is now not expected to get back to the Bank’s 2pc target until the start of 2025. The International Monetary Fund believes it could be even later.
It is against this backdrop that Hunt and Sunak have ruled out any near-term tax cuts.
Lord Lamont backs the Government’s position, saying getting inflation down “has to be the prerequisite before anything else. It needs to be hit firmly on the head”.
He notes the Government is still expected to borrow £131bn this year to plug the gap between taxes and spending. Tax cuts would add to that pile and stretch public finances even further.
“I think you can only cut taxes when the public finances are stronger,” the former chancellor says. “We have still got a very loose fiscal policy and a large deficit. And debt-to-GDP is somewhere around the 100pc mark. I just don’t see how they can do anything dramatic on the tax front for quite a while.”
Ranil Jayawardena (right) served as environment secretary under Liz Truss - Leon Neal/Getty Images Europe
Jayawardena, who served as environment secretary under Truss, agrees that controlling inflation is important but believes that it’s not the government’s job to do so.
“I believe in sound money,” he says. “The trouble is that the Bank of England has been printing money since 2009. That is where we have lost the concept of sound money.
“The Chancellor is absolutely right that we’ve got to get inflation down. The key challenge is how we help hardworking families who are struggling right now. And so that’s why we’re putting forward ideas for targeted tax reform.”
He has been pushing for further childcare reforms that allow families to keep more of their hard-earned cash instead of an extension of subsidies offered by Mr Hunt.
The Conservative Growth Group, which has grown steadily to 60 members, will suggest further reforms to housing, planning and regulation in the coming months, including changes to unpopular taxes like stamp duty. Even the IMF has warned the home sale levy creates distortions.
Members have also been pushing the idea of scrapping inheritance tax, though there have been no discussions directly with Downing Street.
Jayawardena says their thoughtful reforms are designed to stimulate growth without breaking the bank. Faster growth will also help to shrink the debt relative to the size of our economy.
“I still believe that the Conservative Party is the party of lower taxes, and we will make that case in the months ahead,” he says. “I do believe that Jeremy and Rishi want to do that. And that’s why we’re coming up with ideas to help them consider new ways of doing it rather than simply going for broad brush, ‘slash a penny off income tax’ policies.”
The window for action may be closing. The Conservatives are bracing for a wipeout at the next election and pundits are already comparing the looming vote to Tony Blair’s 1997 landslide victory for the Labour Party.
Hunt is not swayed. He is banking on Labour’s long-standing reputation for spending and tax being remembered more than Truss’s ill-judged dash for growth.
“What voters want to know is that their money and jobs are safe,” says a Treasury source. “When you have uncertain times, the calculus is quite different to when times are good. And that’s probably the biggest single difference.
“In 1997, it was safe to go with Labour because the economy was doing well, and Tony Blair had an awful lot more support for capitalism than Keir Starmer has.”
However, if the Government does suffer a thumping defeat, debates on tax within the Conservative Party threaten to escalate into bitter divisions.
Jayawardena downplays the threat, saying: “I do not believe this for one second. The Conservative Party is a broad church. We don’t believe in a command or control party like the socialists do.”
But he admits that the Tories must do more if they have any hope of running the country for another five years.
“We’ve got to demonstrate how we’re going to help people keep more money in their back pocket. Now, and in the future.”
