Lack of rate cuts could scupper Tory election strategy

Central to this “go long” strategy is taxation. Total tax revenue is poised to exceed 37pc of GDP during 2024, a 70-year high.

This is the year we “throw off our pessimism about the UK economy”, said Chancellor Jeremy Hunt in December – a message since dented by news that the UK entered recession in 2023, with GDP shrinking for two successive quarters.

All the more reason, many would argue, for the Tories to cut taxes on Wednesday, when Hunt delivers his make-or-break spring Budget. It’s a statement that needs to galvanise the Conservative Party, boosting its poll rating and stabilising Sunak’s leadership, if the Tories are seriously to challenge Labour this autumn.

In January, Hunt lowered the main rate of employee National Insurance from 12pc to 10pc – saving workers an average of £450 a year. More tax cuts are planned for Hunt’s statement on Wednesday.

The Tories have rightly dampened speculation the inheritance tax threshold will be raised from its current rate of £325,000, frozen until 2028. 

Doing that would, rightly or wrongly, be widely viewed as a further tax break for already relatively wealthy families – given that only around one in 20 estates incurs inheritance tax. And the effective threshold is already £1m if a couple leaves their main residence to their children or grandchildren.

It makes more sense to cut taxation in a way that helps as many people as possible. In April 2021, the then chancellor Sunak froze the tax-free personal allowance at £12,570 – with Hunt extending that freeze, again until 2028.

Had that threshold risen with inflation, as normal, it would now be around £15,620. Instead, this ultimate stealth tax has raised an additional £540 per worker – for someone on £20,000, that’s an 11pc rise in their annual income tax bill.

Hunt should now be bold and lift the personal allowance from £12,570 to £20,000 a year, while keeping the basic rate at 20pc. That would be progressive, helping poorer households much more, while lifting one in five taxpayers out of tax altogether.

The trouble is that Whitehall types – including the Office for Budget Responsibility – purse their lips at such radical measures, pointing to the “on paper” cost.

Yet the extra activity and spending such a move would generate, and the benefit payments spared, means almost doubling the personal allowance would, in my view, more than pay for itself. But Hunt and Sunak are too consensual and unfortunately lack the guts.

What I think will happen on Wednesday is a further drop in National Insurance Contributions. Lowering NIC payments is “cheaper” than cutting income tax – because pensioners pay income tax, but not National Insurance.

Plus, while Scotland has a separate system of income tax, a lower headline NIC rate applies right across the UK, including North of the border, where the Tories are particularly keen to limit Labour’s gains.

That’s why Sunak spent part of last week in Aberdeen, dropping hints the Tories could lower the 75pc windfall tax on companies drilling for oil and gas in the North Sea.

Around half the 320 active North Sea fields are due to cease production by 2030. Yet the UK still relies on domestic production for four fifths of the oil we use and over half the gas.

Hydrocarbons combined account for no less than 75pc of Britain’s energy needs – and will continue to remain vital, even if we do manage to reduce our carbon emissions to net zero by 2050. So either we use our own oil and gas, or pay the higher financial and carbon costs of importing hydrocarbons from overseas.

This argument – this factual reality – is starting to resonate with much of the public, not least in Scotland, where the oil and gas industry remains a major employer. That’s why I think the Tories may soon grasp the nettle and lower the 75pc North Sea windfall tax, while highlighting Labour’s plans to raise it even more.  

The centrepiece of Downing Street’s pre-election strategy, though, is to hope the Bank of England lowers its main interest rate from 5.25pc, where it has been since last summer, at least twice before polling day. Yet that may now not happen.

Inflation has fallen sharply from over 11pc in the autumn of 2022 to 4pc in January – and it may fall again when the February figure is published in a few weeks’ time.

But inflation for now is double the Bank of England’s target and there are signs it could rise again this summer.

Attacks by Houthi rebels on commercial shipping heading for the Suez Canal are driving up inflation for imported goods. The oil price has surged 15pc over the last three months, to around $85 a barrel, amid ongoing hostilities between Russia and Ukraine.

The UK’s 10-year gilt yield has meanwhile risen sharply, up 80 basis points to 4.25pc since January. Traders now doubt the Tories’ precious multiple-rate-cut scenario.

Yes, house prices are up, as homebuyers take on bigger mortgages, keeping their fingers crossed much lower borrowing costs are just around the corner.

But they may not be. And, if they’re not, the Tories’ election strategy is toast.