One could be forgiven for missing the announcement last week of the government’s decision to go ahead with the proposed 1.25% increase in National Insurance – a tax on earnings paid by both employer and employee set to come into force in April.
The move, which ministers have repeatedly downplayed in recent media appearances, will be seen as a victory for Chancellor Rishi Sunak. His reported discomfort with the high levels of government expenditure during the pandemic should be seen as no surprise given his job title as a Conservative Chancellor; not least one presiding over the highest level of peacetime borrowing in the country’s history. Reports of Sunak’s jostling with Boris Johnson have been centred on their competing approaches to the crisis. As chancellor, Sunak’s priority is on getting the snowballing national debt under control, and is thus keen to phase out borrowing as a means of funding the government’s agenda. He perceives in Boris Johnson a people-pleaser, keen to continue upon the government’s high-spend programme and leave the difficult decisions for a later date. Crucially, for Johnson spending cuts are out of the question for risk of appearing to revive the policies of austerity. Here enters the decision to increase the rate of National Insurance, the proceeds of which are intended to help clear NHS backlogs. Johnson’s earlier back-peddling on the policy is regrettable. Allies of Sunak will note it as evidence of his lacking commitment to re-balancing the country’s finances. On the other hand, the most vigorous opponents of the tax rise will feel equally disillusioned by his decision to give the green-light.
Among the ranks of those opponents are prominent figures on the right of the party are David Davis and Lord Frost, the former Chief Brexit negotiator who resigned from the government last month. Both object to the decision to raise taxes at the same time as households face an increase in the cost of living, with the rate of inflation at a 30-year high as of January 2022 and set to peak in April. The government will be under pressure to maintain the Conservative party’s reputation for sound finances by bringing borrowing back under control. It will struggle to do this as it reckons with the Thatcherite wing of the party for whom tax rises are unacceptable, whilst also avoiding courting charges of austerity by imposing spending cuts.
Added to the mix is the 2019 intake of Conservative MPs in representing the so-called former ‘Red Wall’ constituencies, many of whom were elected based on Conservative manifesto commitments to level up parts of the country. MPs in these seats have joined the chorus opposing the tax rise – not least because their constituents are disproportionately likely to experience the squeeze on incomes most acutely. However, they also present more of a long-term challenge to any future Conservative government as they load pressure on the government to increase investment into their constituencies whilst it attempts at lowering the national debt.
The decision to raise money to fund the NHS via taxation rather than borrowing is not just significant in and of itself, but also as an indicator of where the divisions will fall within the party in years to come. It is a problem which will be increasingly significant for Boris Johnson and his future successors. Throughout modern history the Conservatives have kept loyal to their low-tax, low-spend principles. The unique circumstances of the pandemic required the government to adopt an entirely different approach, involving an increase in the national debt to pay for national lockdowns, business bailouts and the furlough scheme. As the government exits the crisis, it will be aware that the Conservative party’s survival as a political force depends on its reputation for fiscal conservatism. It remains to be seen how the party will negotiate its internal conflicts as it attempts to retain this image moving forward.
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