Conservative MPs have warned Jeremy Hunt that refusing to cut taxes in the spring budget would spell “the end of an era” for the party in government, amid disagreement over the latest warning about Britain’s gloomy economic forecast.
In a showdown with backbenchers on Tuesday night, the chancellor was told that voters were lacking hope and feeling depressed. But Hunt was said to have remained defiant and made clear there would not be a “rabbit out of the hat” announcement before the local elections in the spring.
A Treasury source stressed that the goal of halving inflation, which stands at 10.5%, was “not a foregone conclusion” and the government’s focus would remain on trying to slow the pace of price growth instead of on tax cuts. “The situation in September remains much the same as it will be in March,” they said.
Pressure is mounting on Hunt from within his party after the International Monetary Fund’s forecast that Britain will be the only major industrialised country to see its economy shrink this year.
Behind closed doors, Tory MPs delivered polite but pointed calls for Hunt to bring forward tax cuts, which they argued would help boost incomes during the cost of living crisis and help woo back voters, given the Conservatives are still languishing behind Labour in the opinion polls.
“We can’t wait until the next general election, people are depressed, we’ve got to give them hope,” said the backbencher Edward Leigh. “Corporation, personal, fuel tax – you’ve got to give them something.” Another MP told Hunt the Conservative party would face a “fin de siècle” – the end of an era – in government if people did not feel they had more disposable income.
Jacob Rees-Mogg, the former business secretary, echoed the concerns, telling Sky News that the “highest tax burden in 70 years” was “not good for economic growth”.
Hunt did not attend to answer an urgent question in parliament on the IMF’s forecast. The Treasury minister James Cartlidge was sent instead and argued that the figures “do confirm we are not immune to the pressures hitting nearly all advanced economies”.
Halving inflation – one of Rishi Sunak’s five pledges unveiled earlier this month – remained “our top priority”, Cartlidge confirmed. He said: “Inflation is the most insidious tax rise there is and so the best tax cut now is to reduce inflation; it will help families across the country with the cost of living.”
Tory MPs say IMF forecasts have been proved wrong before and could be so again. One of them, John Redwood, said that to do so, the Treasury “needs to go for growth and cut some taxes”.
Labour claimed the IMF’s assessment, which forecast that the UK economy would contract by 0.6% this year – 0.9 percentage points worse than it had pencilled in just three months ago – was the result of “13 years of Tory failure”.
The shadow chancellor, Rachel Reeves, said there would be “weaker growth compared to our competitors” – including sanctions-hit Russia – for each of the next two years. “The question people are now asking is this: are me and my family better off after 13 years of Tory government?” she said. “The answer is no. And as the IMF show today, it doesn’t have to be this way.”
Fresh evidence of the economic slowdown came from official data showing slumping UK demand for mortgages and sharply rising corporate insolvencies in England and Wales.
The Bank of England said the rising cost of servicing mortgages had been accompanied by new home loan approvals falling from 46,200 in November to 35,600 in December – the fourth monthly fall in a row and the weakest performance since the UK was in almost total lockdown in May 2020.
With the exception of the lockdown and its immediate aftermath, mortgage demand was last lower in early 2009, when the UK economy was in deep recession after the near-collapse of the global banking system the previous autumn.
The IMF identified rising interest rates as a reason for cutting its growth forecast for the UK this year from 0.3% to -0.6%, placing Britain at the bottom of the league table of the G7 group of industrialised countries.
Government ministers sought to downplay the IMF report, saying the Washington-based organisation had in the past been overly pessimistic about the UK.
But Ashley Webb, a UK economist at the consultancy Capital Economics said: “Overall, the cumulative downward effect from higher interest rates appears to be starting to weigh more heavily on the economy. And given the large share of fixed-rate mortgages, this effect is only going to grow throughout this year.”
Meanwhile, the steady increase in interest rates from the Bank of England, coupled with the removal of government financial support provided for business during the Covid pandemic, prompted a rise of more than 50% in corporate insolvencies in England and Wales between 2021 and 2022.
Christina Fitzgerald, the president of R3, the insolvency and restructuring trade body, said: “2022 was the year the insolvency dam burst. After two years of being suppressed by government support programmes, corporate insolvency numbers hit a 13-year high last year.”
Responding to the jump in corporate insolvencies from 14,000 to 22,000 last year, Fitzgerald said: “After nearly three years of trading through a pandemic, and in the face of the end of government support, rising costs and a cost of living crisis, many directors simply ran out of road this year and chose to close their businesses before the choice was taken away from them.”