Tories’ tax-cutting optimism drains away as MPs run out of patience

This week a select group of around 50 Tory MPs gathered at the home of Mel Stride, the Work and Pensions Secretary for dinner and drinks.

There was one subject on their minds – the Budget.

Next month’s fiscal event has long been seen by Tories as a final chance to put a lightning bolt in their efforts to turn dismal polling in their favour.

The Prime Minister has spoken of a “gear shift” in taxation – leading MPs to hope significant tax cuts could be coming.

However, to the disappointment of some in the room, the guest of honour Jeremy Hunt was keen to play down expectations.

The Chancellor – who had to dash off for a No 10 budget meeting before the food came – told those present that while he wanted to make the event, which he said was probably the last big fiscal event pre-election, as politically helpful as possible, he was limited by the economic circumstances in how far he could go.

Next month’s Budget has long been seen as the final item in a strong of set piece events that Sunak could use to change the narrative and boost the Tories.

Last summer, the mood at No 10 was rather more optimistic than it is now. The view was that Sunak had spent the first stage of his premiership calming the markets in the wake of Liz Truss’s mini-Budget but was now in a position to sell himself and his Government to the public.

There would be the party conference speech, a cabinet reshuffle, King’s Speech, an autumn statement and then – drum roll – a spring budget to seal the deal.

Alas for Sunak, the first four have come and gone with little to show for it in terms of a poll bounce. Sunak remains about 20 points behind Starmer and Tory MPs are fast giving up on the idea much could change that.

The Budget has long been seen as Sunak’s best – and perhaps last chance – to change the narrative ahead of the short campaign. Yet the truth is within Government, there is scepticism that Sunak and Hunt have the tools at hand to do that.

“There is a lot of expectation around the budget,” reports a senior Tory. “They’ve moved the strategy to the economy so we need something to sell on the doorstep.”

With Sunak increasingly talking about tax as the dividing line between Labour and the Tories and not bringing up boats, it’s clear how the Prime Minister would like to fight the election. However, the problem he faces is that so far this year, various economic indicators have deteriorated rather than improved.

This week there were reports of a record budget surplus which some heralded as a “boost” for Hunt. However, while the Government recouped record revenues in January – with a surplus of £16.7bn – the public finances are not as healthy as was predicted at the beginning of the year. Instead, the increasing cost of Government borrowing in the past six weeks means Hunt and Sunak are boxed in.

One of the problems is that at the very beginning of the year there was a lot of optimistic talk about rate cuts sooner than expected – instead inflation has proved more stubborn and the Bank of England has kept rates where they are.

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It means there could be some hard decisions to make plans stack up – one option is to cut future spending plans. Total Government spending is meant to increase by 1 per cent beyond 2025 – but this could be reduced to for example a 0.75 per cent increase.

How exactly this would shake out would be something for a future spending review – which would be decided by the next government. Such a move would see the Tories accused of making Labour’s hand, if they win the next election, even harder.

Then there are the goodies Hunt is no longer in a place to offer. Top of that list is inheritance tax. As a government insider puts it: “It neither grows the economy or rewards work. It’s something we could only have done if everything else was going right.” This will be a disappointment to Tory MPs in blue wall seats who saw a cut to inheritance tax as a way to appeal to constituents whose main asset is their home.

It means the expectation is that the Spring Budget will not go as far as the Autumn Statement when Hunt announced a 2p cut to national insurance.

There is still likely to be a small cut to either national insurance or income tax. The argument being made internally in favour of the income tax cut is that it goes to more people and could be easier to sell to the public. The latter point matters as despite the Tories carrying out the largest tax cutting event since 1988 in the autumn, Sunak did not get much thanks for it.

This is in part because fiscal drag means many still feel worse off even if the tax burden is rising less sharply than it would have done otherwise. Tory MPs want this time around to get recognition for what’s announced.

One particularly contentious measure among Tory MPs is the current tourist tax. As Chancellor, Sunak axed tax-free shopping for tourists. Liz Truss brought it back in her mini-Budget but then it was cancelled again when Hunt undid most of her measures.

When Hunt spoke to MPs on Wednesday, this kept coming up in the Q and A. Tory MPs were arguing that bringing back tax-free shopping for tourists will boost the economy and is a no-brainer. Hunt said he was in listening mode but – given Sunak was the one to originally axe it – there is scepticism the government will move. A former minister says that when they once raised it with a member of Sunak’s team, they were dismissed as pushing for a Trussite measure.

However, Sunak and Hunt ought to tread carefully. Given we are unlikely to see the tax-cutting bonanza many MPs had been hoping for, the duo do need to find some smaller wins that they can sell to an impatient party. Otherwise the sense of doom about the coming election will only grow.