i News by Hugo Gye, Chloe Chaplain, Richard Vaughan, Arj Singh
As Rishi Sunak spends his weekend jetsetting around the world – with a trip to San Diego starting on Sunday after Friday’s jaunt to Paris – Jeremy Hunt is holed up in Westminster putting the finishing touches to his Budget.
The Chancellor is still being furiously lobbied by MPs, businesses and interest groups; but insiders say they are wasting their breath, given that all the biggest measures in the Budget were more or less done over a week ago, when the Treasury submitted a near-final draft to the Office for Budget Responsibility (OBR) so its forecasters can rule on the future path of the public finances.
It is that OBR forecast that will ensure that the Budget offers nothing but – in the words of one source close to Mr Hunt – “thin gruel”. The outlook has hardly changed since the Autumn Statement just four months ago, meaning the Chancellor will have little space for fiscal giveaways beyond the heavily trailed decisions to freeze fuel duty, extend energy bills support and push up defence spending.
After several years of lavish spending on infrastructure, the Treasury is throttling back, as shown by the decision on Thursday to delay the HS2 rail line yet again and push back major road-building projects. “Inflation has just been really bad for all that stuff,” a Whitehall official told i. Behind the scenes, the Treasury has been wrestling with HS2 for two years amid fears the project was spiralling unstoppably out of control.
Instead, Mr Hunt’s strategy will urge patience – holding out the hope of tax cuts before the next election, perhaps as soon as this year, if borrowing does not increase and the economy does not undergo too brutal a recession. “I think they are going to leave themselves space to announce tax cuts in the Autumn Statement if things improve, to satisfy the economically illiterate wing of the party,” a Conservative veteran said.
Some MPs are surprisingly upbeat. One said: “I don’t think it’s going to be all doom and gloom, we’ve not gone into recession so there’s a bit more leeway.” Others, particularly among Liz Truss’s former followers, are more anxious.
As part of his attempts to keep the right of the Tory party onside, Mr Hunt will announce that he is accepting some of the policies which Ms Truss was planning to pursue before her premiership came to an untimely end. He will pledge to reform the “doctors’ tax trap” that can occur when pension contributions increase, by lifting the personal tax allowance threshold, i understands – a key demand of the Conservative Growth Group of leading Trussites.
The Chancellor is also planning to explain how the Government will reform business regulations will change after Brexit, following a review of the topic led by Sir Patrick Vallance before he steps down as chief scientific adviser next month. But other policies beloved by the right, including changes to the IR35 tax rules which govern how freelancers are paid, have been put on ice. Britain Remade, a campaign group headed by former Boris Johnson aide Sam Richards, has called for Mr Hunt to take the bold move of permanently allowing firms to exempt all the profits they re-invest in machinery and buildings from corporation tax. Mr Richards said: “Anything other than a permanent change would simply be a furlough scheme for Britain’s anaemic growth over the past 13 years when what we need is a vaccine.”
Ms Truss’s plans for a series of “investment zones” will be resurrected, albeit in a significantly stripped-back form with most of the tax breaks previously attached to the scheme ditched. “They wanted little mini-Liechtensteins dotted through the land until the whole country became one,” a Treasury source said, describing the idea as “Singapore-on-Thames through the back door”. Instead, the zones will focus on universities and other research centres which could become hubs of business activity outside London.
Despite the “no dramas” approach favoured by Mr Hunt and his boss Mr Sunak, the Treasury has been locked in battle with a number of other departments, with ministers quietly frustrated about the total dominance that No 11 has over the Government.
As the extent of the rising problem of economic inactivity became apparent last year, Work and Pensions Secretary Mel Stride was commissioned to do a workforce review in autumn. Sources said there had initially been talk of him making some kind of policy speech in the early months of the year but, as the Budget neared, the Treasury took increasing control over decision-making.
Government insiders were acutely aware that economic inactivity and workforce issues would be one of the dominating issues of the first quarter of 2023 and that Mr Stride would be leading on this. But a promised speech has yet materialised and there is no current plan for the workforce review to be published separately, with all the key aspects being swallowed up into the Budget instead.
A Work and Pensions source said that all departments were asked to submit policy proposals last month but that it was up to the Chancellor what measures would be taken forward. “We always knew that the outcome of the review would feed into the Budget but I think everyone clear that it is Mel who has led the review itself and driven the outcomes,” they said.
Another future flashpoint between Mr Stride and Mr Hunt is approaching in the coming months, with the two ministers likely to clash over whether to increase the state pension age. Treasury sources have hinted they want to bump up the retirement age sooner to save long-term spending, whereas DWP insiders argue there is no justification for this given the stagnating life expectancy.
Once Wednesday’s Budget is done, the spotlight will shift from the Chancellor. But there is no let-up for Mr Sunak, who remains stranded in the polls more than 15 points behind Labour even as he attracts plaudits for the businesslike way he goes about his work. One of Labour’s shadow ministers admitted: “He’s clearly brought in a sense of competence and getting stuff done. All the day-to-day business with Johnson and Cummings was campaigning, not governing.” Nonetheless, i understands foreign diplomats based in London have started quietly approaching polling experts asking for briefings on upcoming local elections so they can understand whether or not the Opposition is indeed on course for a huge Commons majority next year.
The Prime Minister admitted on Friday he was having a “tough” time, with little immediate return from many of the projects he has embarked on. He told reporters: “I am confident that we are doing the right things that will make a difference to people’s lives and even if you don’t see the benefit of that every day, inside I look in the mirror every day and I’m working as hard as I can. I’m doing the right thing and in time it will make a difference to people’s lives. And that’s what keeps you going.”
As well as the Budget, upcoming challenges include unveiling the updated version of the UK’s “integrated review” of foreign, defence and security policy, which Mr Sunak will announce while he is in San Diego with Joe Biden and Australia’s leader Anthony Albanese – then, later in the month, the all-important updates on interest rates and inflation which will show whether his mission of easing the national financial squeeze is working. “It was a good week,” one minister said as they reflected on the Prime Minister’s recent foreign policy wins. “But we need a lot more good weeks to come.”