Conservative Conference 2022 (part 1): New Government goes for growth

11 Oct 2022

Part one (of four) of our annual assessment of Conservative tax and related policy following the party's conference. This part focuses on the conference headlines, including fallout from the mini-Budget and the Government's u-turn on the 45p rate of income tax.

This report includes:

New government goes for growth – but message overshadowed by mini-Budget fallout
Markets and voters unimpressed by ‘borrow for tax cuts’ plan
Opposition from MPs forces u-turn on 45p rate
After the u-turn – the fall out, and the future
Embattled Chancellor attempts to fight back

The other parts of our post-conference assessment of Conservative tax and related policy can be read at:
Conservative Conference 2022 (part 2): Review puts spotlight on high marginal rates and taxing families
Conservative Conference 2022 (part 3): Government seeks to woo business with low tax and deregulation
Conservative Conference 2022 (part 4): Can Government convince OBR it can meet its targets?

Above: New Chancellor Kwasi Kwarteng made his keynote address to the conference on the Monday afternoon, telling party members: “We are listening and have listened.”

New government goes for growth – but message overshadowed by mini-Budget fallout

New Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng had been in post less than four weeks when the Conservative Party Conference began in Birmingham, but it proved no honeymoon, as the party leadership’s efforts to showcase their plans for economic growth were hampered by the fallout from the badly received (and misnamed) ‘mini-Budget’ a week earlier.

In her keynote speech Liz Truss told party members: “I have three priorities for our economy: growth, growth and growth. Growth means more money in people's pockets. It means businesses creating jobs. Growth means people can feel secure and they can plan for their future.” To deliver this growth, she said that she and the Chancellor would be taking action in three areas: lowering the tax burden, keeping an ‘iron grip’ on the nation’s finances and driving economic reforms ‘to build our country for a new era’.

The most evident of these three pillars of growth thus far has been lower taxes. Truss reminded her audience of some of the measures announced in the mini-Budget: a cut to Stamp Duty Land Tax, reversal of the increase in National Insurance, keeping corporation tax at 19 per cent and cutting the basic rate of income tax.

She told them: “The Conservative Party will always be the party of low taxes. Cutting taxes is the right thing to do morally and economically. Morally, because the state does not spend its own money. It spends the people's money. Economically, because if people keep more of their own money, they are inspired to do more of what they do best. This is what grows the economy. When the government plays too big a role, people feel smaller. High taxes mean you feel it's less worthwhile working that extra hour, going for a better job or setting up your own business. That, my friends, is why we are cutting taxes.”

The PM sought to crystallise the choice as being between her and an ‘anti-growth coalition’ of all her opponents. These included not just other political parties but also: “the militant unions, the vested interests dressed up as think-tanks, the talking heads, the Brexit deniers and Extinction Rebellion”. These people “peddle the same old answers… more taxes, more regulation and more meddling.” They are: “Wrong, wrong, wrong.” We can expect to see more of this framing in the months ahead, but whether the message will achieve traction beyond the limited market of Truss loyalists and free market true believers remains to be seen.

Markets and voters unimpressed by ‘borrow for tax cuts’ plan

The announcement on 23 September of the biggest package of tax cuts from a UK government in half a century was designed to lift spirits and kickstart economic growth, but the reaction of the markets has been one of alarm, while public opinion on the Government’s plans has been overwhelmingly negative.

The pound touched a record low in the immediate aftermath of the mini-Budget, amid turmoil on the markets. The most spectacular reaction was in the bond market where yields on gilts (UK government IOUs) immediately spiked higher on the prospect of a big surge in government borrowing. Sky’s veteran business presenter Ian King observed that what the gilt market was worried about was this amount of fiscal loosening at a time when there is monetary tightening being carried out by the Bank of England. The lack of a forecast from the UK’s fiscal watchdog, the Office for Budget Responsibility, added to market nervousness. Some mortgage providers temporarily suspended offering mortgage deals to customers (before returning with significantly higher rates), and the Bank of England launched a programme of emergency gilt purchases to prop up the market amid concern over the viability of some pension funds.

Public reaction has been similarly bleak for the Government. A survey by Savanta ComRes for The Independent, conducted as the conference began, found 68 per cent of voters thought the mini-Budget has had an immediate negative effect on the economy, 62 per cent thought it would harm the economy in the long term and 67 per cent said it would damage living standards. Even most of the diminished band of Conservative voters see it as having a negative effect. Across the electorate, a massive 70 per cent of those polled believed that the Government’s economic strategy favours the richest in society, compared to 5 per cent who thought it benefited mainly the middle classes, 5 per cent the poor and 12 per cent all working people regardless of income. Most of those polled thought the Prime Minister and Chancellor should resign. Even most Conservatives want the Chancellor to go.

However there is a chink of light for the Conservatives in the views people hold on individual measures within the package. The most unpopular (opposed by 57 per cent and supported by just 21 per cent) was the abolition of the 45p rate, a policy which has now been ditched (see below). Cuts in income tax, national insurance and stamp duty land tax all command majority support. Keeping corporation tax at 19 per cent is supported and opposed by equal numbers of people. If markets can be kept calm and the future focus kept on tax cuts ‘for the many’ there does appear to be some potential for The Growth Plan to grow on people, especially if evidence of growth actually begins to emerge. But in the meantime public opinion is universally dismal for the Conservatives, with the ruling party trailing Labour by 17 to 33 points in surveys carried out since the mini-Budget.

How much growth equals success? Chief Secretary to the Treasury Chris Philp told a fringe meeting at the conference that he was confident that implementing the measures in The Growth Plan would unleash the potential of the UK such that it would increase the growth rate by at least a percentage point above what it otherwise would be. The Growth Plan itself gives a target of reaching a 2.5 per cent trend rate. The current growth rate is hard to assess due to exceptional factors primarily related to the pandemic. UK GDP rose by 7.5 per cent in 2021 but this followed a fall of 11.0 per cent in 2020.

Opposition from MPs forces u-turn on 45p rate

Early on the Monday morning of conference, ahead of the Chancellor’s speech to conference, the Government u-turned on plans to scrap the 45p additional rate of income tax paid by people earning more than £150,000 a year, in what became the biggest announcement at the conference. The Chancellor said the proposal, announced just 10 days earlier, had become ‘a massive distraction on what was a strong package’.

The policy had been defended by senior ministers right up to the point when it was ditched. The previous morning the Prime Minister had told the BBC's Sunday with Laura Kuenssberg that the 45p rate "raises very little" and makes the tax system more complicated. At an Institute of Economic Affairs (IEA) event on the conference fringe on Sunday afternoon, Chief Secretary Chris Philp said that when the top rate was cut from 50p to 45p it had no negative impact on the amount being raised and he listed countries and US states where someone earning £150,000 a year pays less than they currently do in the UK. “This Government is going to stick by its plans to make our tax rate competitive because by doing that we will grow the economy, encourage innovation, encourage people to come here and ultimately raise more money to fund public services,” he vowed.

However opposition to the tax cut was growing. Former Cabinet big-hitter Michael Gove said using borrowed money to pay for tax cuts was ‘not Conservative’ and that it was wrong to cut the top rate of income tax and scrap the cap on bankers' bonuses "at a time when people are suffering". He signalled he would not vote for it. Another former cabinet minister, Grant Shapps, wrote a blistering op-ed for The Times, describing the move as “an unforced error that is harming the Government’s economic credibility.” Other MPs made similar criticisms and suggested they would not support it.

Even those broadly supportive of the Government’s economic policy made criticisms of the approach taken in the mini-Budget. Free market economist Gerard Lyons (who was an adviser to Liz Truss during the leadership contest), appearing on the same IEA panel as Chris Philp (see above), rated the mini-Budget 8 out of 10, but said that announcing the scrapping of the top rate was wrong at this time even if it was a desirable measure. It should have been held until a full Budget and fully costed.

According to The Sun, the way that events unfolded on Sunday evening is that 1922 committee chairman Graham Brady (effectively the spokesperson for Conservative backbenchers) went to see the Prime Minister at 7pm and warned her she did not have a majority for the measure. The PM then promptly called her Chancellor, who abandoned his dinner meeting across town (which happened to be with The Sun) before the main course was served to meet her for crisis talks. The news of the u-turn leaked out that night via The Sun and was formally announced early the following morning.

Appearing on BBC Breakfast shortly after the announcement the Chancellor said that the proposal had been "drowning out a strong package", including support for energy bills, and cuts to the basic rate of income tax and corporation tax. He said that he had "the humility to say ‘look, we got it wrong’". However, in his conference speech later that day, the Chancellor referred to the u-turn only obliquely, saying: “I know the plan put forward only ten days ago has caused a little turbulence. I get it. We are listening and have listened.”

After the u-turn – the fall out, and the future

This may not be the last attempt from this Government to cut income tax for higher earners. And it almost certainly won’t be the last policy reversal, now parliamentarians have developed a taste for flexing their muscles.

Responding to the U-turn, most Cabinet ministers seemed to acknowledge (albeit anonymously) this was the right decision. “I think we came into contact with the inevitable,” one told The Guardian. Another said there was a clear need to return to a more rigorous system of cabinet discussions and responsibility, and hinted that a shake-up of No 10 was in the works. But Home Secretary Suella Braverman told the Telegraph she was ‘disappointed’ by the 45p tax U-turn and accused her fellow MPs of having ‘staged a coup and undermined the PM in an unprofessional way’.

Authorship of the policy, and the u-turn, was subject to considerable speculation over the conference. The Prime Minister told the BBC on the Sunday that the cut was a decision made by the Chancellor - prompting former cabinet minister Nadine Dorries to accuse her of throwing him "under a bus". It was widely reported that the paper proposing the cut had been presented by the Chief Secretary, though he would not confirm this. Asked on BBC Breakfast how the decision to drop the policy was made, the Chancellor said, "The prime minister decided not to proceed with the abolition of the rate", before clarifying that “we decided together, we were in agreement that we wouldn't proceed with the abolition of the rate."

Is this the end of the story? Probably not, in three respects.

Firstly the proposal may return, albeit not quickly. The Prime Minister told the BBC she is ‘not contemplating’ reviving the plan at the moment and that it ‘wasn’t a priority policy’ for her Government. However she said she was still in favour of lowering tax for the highest earners: “I would like to see the higher rate lower, I want us to be a competitive country.” One credible possibility is that we might see the threshold for the top rate rise significantly from the current £150,000 at the next Budget, perhaps alongside increases in the personal allowance and higher rate threshold, though this depends on the Government’s judgment about its room for further manoeuvre on tax cuts.

Secondly, notwithstanding the determination of senior ministers to stay the course on the Government’s economic strategy, the success that MPs and other opponents of this policy had in getting it dropped is likely to embolden them to demand further changes. Commenting on the 45p u-turn, Mel Stride, the chair of the Treasury select committee, appeared to signal this when he said there were significant issues that remained: “It may be that there will be even yet further requirements to unwind some of those positions.”

One illustration of this is the concerted effort we have already seen to get the Government to commit to uprate benefits in line with inflation (see here). None of the other tax measures so far announced look particularly vulnerable but some of the supply-side reforms being mooted (for example planning reforms and fracking) may be hard for the Government to get through Parliament if Conservative backbenchers and opposition parties can find common ground.

Finally, it is not only MPs that may force further changes to the Government’s fiscal package. According to The Independent, a ‘senior No 10 official’ has told them that Downing Street is re-examining measures unveiled on 23 September to see if changes or U-turns might be required. The official is quoted as saying: “The turmoil in markets and the need to show fiscal prudence are being heeded. Everything is being looked at again, including tax cuts. Options being considered are believed to include a staggered rise in corporation tax, and moving the 1p cut in the basic rate of income tax back to 2024 from 2023.

Embattled Chancellor attempts to fight back

The Taxpayers’ Alliance/IEA ‘Conversation with Kwasi Kwarteng’ on Tuesday evening gave the embattled Chancellor a chance to respond directly to criticism about the mini-Budget in front of a packed tent of party members.

Asked if the Government’s other tax cut measures (like the cut to the basic rate) would stay in light of the 45p reversal, Kwarteng said ‘absolutely’. The basic rate cut is ‘one of the most important measures’ in the Budget and the ‘right thing to do’, he claimed. He argued that in spite of the 45p rate u-turn, this was a Budget that has started to change mindsets because ‘everyone’s talking about growth’. The road we had been on (raising taxes and low growth) was ‘unsustainable’, he claimed.

This claim that the path Truss and Kwarteng inherited from Johnson and Sunak had been ‘unsustainable’ was also made by the Chancellor in his platform speech to the conference. It was a strong criticism for a Chancellor to make of an administration he had been a part of, and sat a little oddly with his praise elsewhere in the speech for the achievements of the Conservatives since the party came into government in 2010, of which he said (after condemning Labour’s ‘economic incompetence’): “We reversed that story of national decline.”

The Chancellor argued at the Taxpayers’ Alliance/IEA event that the Government has ‘a moral duty’ to manage the public finances well, which needs a disciplined approach. The best public services can be provided if we grow the economy and generate more tax receipts – “that’s why I’m 100 per cent focused on growth”.

Kwarteng said increasing the Annual Investment Allowance permanently to £1 million was one of ‘lots and lots’ of pro-growth measures the Government were pursuing.

Asked whether the reversal on the 45p tax rate was the result of an internal ‘coup’ (as the Home Secretary had suggested), he would not be drawn. He repeated his view that the issue had become a ‘huge distraction” for the Government. He emphasised that the Government wants to reform taxes to help make the UK a ‘hub of investment’.