The pandemic has forced Rishi Sunak into the unthinkable on corporation tax – but Tory discontent is just around the corner
Though he was dressed in what looked like the same suit, and identical pale grey tie, absolutely nothing about Rishi Sunak’s second Budget bore any resemblance to the first.
In the past twelve months – which, given the pandemic, seem like a lifetime – the Chancellor has been pulled a long way from his fiscal belief system. Coronavirus has pushed him into a new political space entirely.
It's a reality where Labour’s Keir Starmer called for zero tax rises, while Sunak hiked up corporation tax paid on company profits from 19% to 25%, to be introduced in 2023. It’s the first rise since 1974, which is six years before Sunak was even born.
This is one of a number of measures the naturally low-tax Conservative Chancellor feels is necessary to chip away at the £407bn cost of the crisis to the Exchequer.
The move will raise an extra £17bn; but it can also be seen as a swipe on business that jeopardises Britain's competitiveness. It is antithetical to the Tory economic view for at least the past decade.
Former Chancellor George Osborne cut it year after year, presenting it to cheering backbenchers as a source of national pride, eventually whittling it away until the UK had the lowest rate in the G7. Any Tory who came up through the Cameroon years – and that is a lot of Sunak’s colleagues - was wedded to it.
As Covid Recovery Group chair Mark Harper, who has a certain level of influence among colleagues, told the Commons: low tax is “central to being a Conservative”.
It started with former Brexit secretary David Davis, a man who has been around long enough to witness several iterations of the low-tax Tory party. He spoke in the Commons, praising Sunak for his skill and sensitivity in such bleak economic times, but his central concern was the corporation tax hike. It felt like he was setting the tone for what could turn out to be two very long years for the Chancellor at the despatch box.
“The one thing I’m worried about in this Budget is the proposal to go to a 25 percent corporation tax in a couple of years.
“That will have precisely the deterrent effect I worry about with respect to inward investment,” he said.
In a post-Brexit world, has the UK just made itself look much less attractive?
The DUP’s Sammy Wilson said he’d thought the UK was on a pathway to becoming the ‘Singapore of Europe’ as an attractive place for investment. But this decision puts a fly in the ointment.
The island of Ireland puts the ramifications of such a move in stark relief: Colum Eastwood, the SDLP’s sole MP, pointed out that in Donegal corporation tax is 12.5% – but in Derry, a mile away and across the border, it will soon be 25%.
Sunak said he wanted to be honest with the public about tax rises, and pointed only the top 10% of businesses, those with profits of £250k - will pay the top rate because of a tapering system. It also comes in only after the OBR expects the economy to have turned a corner. And any company that invests can take advantage of an unprecedented Super Deduction, where they can reduce their taxable profits by 130 per cent.
But as a party of business, the Conservatives should also be worried about the CBI’s remarks. Director-General Tony Danker said: “Moving corporation tax to 25% in one leap will cause a sharp intake of breath for many businesses and sends a worrying signal to those planning to invest in the UK.” He said it leaves open a question on UK competitiveness, and that kind of thought process will filter down onto the backbench.
The ill-feeling about corporation tax might be squared away in Tory MPs' minds by it being an unprecedented economic time. Select committee chair Huw Merriman said he understand why it needed to be done.
Yet if the grumbling was there on day one in the Commons, when the dust has settled and business owners start vehemently making their case – including those in Northern Ireland – surely this discontent is likely to grow.
At the very least there are likely to be calls to reduce it in 2023 or the years immediately after if the economy shows promising signs.
Sunak is a natural free-market, low-tax Tory, and yet there’s just no getting away from the fact he just rejected the fiscal orthodoxy he, and his contemporaries grew up with.
Now he’s got to defend it wholeheartedly to his natural political allies, for the next two years, and possibly beyond. When something as foundational to a party’s image as low-tax is abandoned, there’s every chance this hike could turn into the Tory party’s next bête noire, even in the unprecedented economy of a pandemic.