Conservative Conference 2022 (part 4): Can Government convince OBR it can meet its targets?

11 Oct 2022

Part four (of four) of our annual assessment of Conservative tax and related policy following the party's conference. This part covers a mix of issues not covered in the previous three parts, including fiscal discipline, welfare, post-Brexit policy and tax in Scotland, as well as what happens next.

This report includes:

Fiscal discipline – can Government convince OBR it can meet its targets?
Pressure growing on leadership to uprate benefits with inflation
Brexit (continued) - Vive la difference, mes amis
Scottish leader calls on SNP to match UK Government tax cuts
Conference news in brief - Dirty Money, VAT, Levelling Up, Future of the Conservative Party
What next?

The other parts of our post-conference assessment of Conservative tax and related policy can be read at:
Conservative Conference 2022 (part 1): New Government goes for growth
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

Above: The CIOT/IFS debate at the conference heard the Chancellor's speech followed by reaction from the expert panel

Fiscal discipline – can Government convince OBR it can meet its targets?

The Government is facing a battle to convince markets and voters that it has fiscal discipline. With the next fiscal event taking place on 31 October it has just days to convince the OBR its sums will add up and deliver the growth they are aiming for.

The greatest divide in the modern day Conservative Party is no longer between ‘leavers’ and ‘remainers’, it is between fiscal traditionalists and radicals. The former, represented in the summer’s leadership contest by Rishi Sunak, think tax cuts have to wait until the economy is back on track and they can be afforded. The latter camp, including the Prime Minister and Chancellor, think that without tax cuts the economy won’t get back on track. The former think the latter are fiscally irresponsible and risk crashing the economy. The latter think the former are part of the ‘Treasury orthodoxy’ that has put us on the brink of recession.

Following the negative market reaction to the mini-Budget (see here) the Prime Minister and Chancellor went into the conference under pressure to show the Government is fiscally responsible. In his conference speech, Kwasi Kwarteng said the Government would forge a new economic deal for Britain backed by an ‘ironclad commitment to fiscal discipline’. Kwarteng said his entire approach will be underpinned by a strong institutional framework, including ‘our independent’ Bank of England and Office for Budget Responsibility (OBR). “We will have a strong fiscal anchor with debt falling as a proportion of GDP over the medium term,” he said.

Vowing to act in a ‘fiscally sustainable and responsible way’, the Chancellor promised that the Government’s Medium-Term Fiscal Plan setting out their approach more fully would be published ‘shortly’. It will set out how we plan to get debt falling as a percentage of GDP over the medium term, he announced. And he confirmed he has asked the OBR to publish a full economic and fiscal forecast alongside it. “There is no path to higher sustainable economic growth without fiscal responsibility,” he told the conference.

In her conference speech, the Prime Minister similarly vowed to ‘keep an iron grip on the nation’s finances’, saying she believes in ‘getting value for the taxpayer’ and ‘sound money’. Liz Truss told the audience of her shock at opening her first-ever pay cheque and seeing how much money the taxman had taken out. She repeated the commitment to bring down debt as a proportion of the UK’s national income.

The Government’s approach faced scepticism at the CIOT’s joint event with the Institute for Fiscal Studies (IFS) at the conference. Speaking immediately after the Chancellor’s address, Chris Giles, the Financial Times’ Economics Editor, said that the Chancellor had delivered some “very nice words” that few would find fault with, but that the ambition to achieve fiscal discipline had yet to be backed up by evidence of how it would work in practice. Stuart Adam of the IFS welcomed the Government’s focus on economic growth but cautioned against making assumptions about future growth, which may have worried the markets in the aftermath of September’s fiscal event. Giles said that when the Chancellor sets out his fiscal plan he should set out credible fiscal rules and avoid gimmicks, especially the temptation to defer ‘very steep’ spending cuts until after the next general election.

Kwarteng rowed back somewhat during the conference from his (and the Prime Minister’s) previous criticism of ‘Treasury orthodoxy’. Asked at a question time session whether the Government should look at the creation of an Office for Economic Growth separate from the Treasury, the Chancellor answered that the Treasury was a ‘first class institution’. There are many talented people working hard in the Treasury, he said.

Whether Kwarteng and Truss have succeeded in calming their party and the markets is debatable. All eyes are now on the Medium-Term Fiscal Plan and accompanying OBR forecasts. Originally slated to be published on 23 November it has been brought forward to 31 October in response to pressure to show as soon as possible that the Government is on a sustainable fiscal path.

Pressure growing on leadership to uprate benefits with inflation

Despite vague talk of ‘welfare reform’ there is no immediate sign of impending structural changes to either the benefits or pensions systems (though childcare reforms are promised). Attention is focused on the decision about whether to uprate benefits in line with inflation next year.

During the summer leadership contest Liz Truss spoke of the need to ‘reform welfare’ and also promised to ‘clamp down’ on the benefits system but the Government has so far been short on specifics. The one measure so far announced – in the mini-Budget – was that claimants currently working up to 15 hours a week on the National Living Wage will now be required to meet regularly with a Job Centre work coach and take steps to increase their earnings.

The Work and Pensions Secretary Chloe Smith did not give a speech at this year’s conference, instead having a short question and answer session on the main stage. In the Q&A she emphasised helping people return to work, especially women. Smith said the DWP needs to help businesses fill their vacancies and especially help people who are classed as ‘economically inactive’. In the past three years there has been a rising number of people leaving work because of health problems. Smith said we must retain that talent. DWP is stepping up support to job seekers over age of 50 years-old, investing £222 million to tackle joblessness in that age group. She reaffirmed that pensions will be supported by the ‘triple lock’ next year.

While pensioners will get an inflationary rise next year the decision over whether to uprate benefits in line with inflation (which would be the normal state of affairs) or by some lower figure such as average earnings appears to be in the balance. This was a major focus during the conference and the days following, with senior ministers past and present speaking out following the suggestion of a real terms benefit cut. Former Work and Pensions Secretary Sir Iain Duncan Smith argued at a fringe event that it does not make sense not to uprate benefits in line with inflation. He said that universal credit and growth go hand in hand, and claimed the group ‘most likely to spend the money that you give them’ are people on benefits. New Leader of the House of Commons Penny Mordaunt was the first Cabinet minister to say ‘it makes sense’ to increase benefits at the current 10 per cent rate of inflation. Former cabinet minister Nadine Dorries, quoted in The Times, said: “Boris Johnson’s government was clear that benefits should rise with inflation — this must be right.” Treasury Committee chair Mel Stride was among the other arguing for retention of the benefits-inflation link.

Reports during the conference suggested that the Prime Minister would ‘face down the rebels’ on the basis that it is unfair for benefit claimants to get a bigger increase than workers. However, according to quotes given to weekend newspapers following the conference, the Prime Minister remains “genuinely undecided about this and there’s a process to go through”. Analysis for The Observer calculated that the poorest families would lose £400 a year if benefits rise in line with pay rather than inflation.

Ahead of the conference, the Daily Telegraph reported that the Government will drive the creation of new childminder agencies under a French-style system to slash the cost of childcare. The agencies could be given public money to grow while childminders could also be released from individual Ofsted inspections, with regulation by the watchdog focusing on the agencies instead. Childminders could also be given permission to work from council homes. But this received little attention at the conference.

At an Adam Smith Institute (ASI) fringe event, the think-tank offered the view that Britain has some of the most restrictive childcare regulations in the world. Currently in the UK one adult is required for every three babies, four toddlers, or eight children over the age of three. Our staff-to-child ratios are apparently some of the strictest in Europe and the ASI thinks the Government should follow Denmark, Spain, and Sweden's lead and scrap child-staff ratio mandates altogether. It says this would leave more money in the pocket of parents without undermining quality of care. But the only MP on its panel, backbencher Mark Harper, said this was not an urgent matter, saying you can only do things at the margins with formal childcare. He wondered if the focus should be on making it easier to access informal childcare.

Brexit (continued) - Vive la difference, mes amis

The Government wants friendlier relations with the European Union (EU), but greater divergence from EU regulations. New data protection rules to replace GDPR are an example of what this means in practice.

The unfinished business of Brexit continues to loom over UK politics, particularly the Northern Ireland Protocol. Efforts seem to be being made to build bridges. James Cleverly, Foreign Secretary, said a good diplomatic and economic relationship with the EU and its member states is ‘good for us all’ and addressing the current problems with the Protocol is key to that. He said he wants to restore the integrity of the UK internal market, protect North/South trade, restore the balance of the Belfast Good Friday Agreement and re-establish devolved government. While the controversial Northern Ireland Protocol bill works its way through parliament, Cleverly said he will continue to pursue a negotiated settlement which respects the constitutional integrity of the UK and our single market, and also supports the institutions of the Belfast Agreement.

Ireland’s foreign minister Simon Coveney responded positively, claiming ‘the mood music has changed quite fundamentally [on the protocol]. We welcome that and we will work on, not only the relationships to rebuild trust, but also work on solutions in a practical way’.

Some of Coveney’s positivity may stem from ardent Brexiteer and new Northern Ireland minister Steve Baker apologising to Ireland and the EU for the behaviour of the Brexit camp and European Research Group (ERG) he led during Theresa May’s premiership. Baker told the conference that he and others in the party had not shown respect to the ‘legitimate interests’ of Ireland or the EU during the campaign to leave the bloc. The ERG blocked Theresa May’s attempt to reach a UK-wide solution to the Irish border question, dubbed the ‘backstop’, but backed Boris Johnson’s protocol which left a border down the Irish Sea.

The Prime Minister struck a slightly different note in her conference speech, vowing to distance the UK further and further from the EU in regulatory terms. She told the hall that: “By the end of the year, all EU red tape will be consigned to history. Instead we will ensure that regulation is pro-business and pro-growth.”

Similar pledges to use ‘Brexit freedoms’ were heard from other senior ministers at the conference. Home Secretary Suella Braverman told party members she backed Brexit “because I wanted Britain to have control over our migration and to cut overall numbers… We should use our newfound control to deliver the kind of migration that grows our economy, for example that helps projects that have stalled or builds friendships and relationships with our allies”.

Brexit was not as prominent on the conference fringe as it has been in previous years but it was used occasionally by MPs to differentiate the party from Labour, suggesting that Conservatives will continue to make Brexit an issue in Leave voting areas at the next general election.

The Conservatives will never win back younger voters as an anti-Europe and populist party, former cabinet ministers warned at a European Movement fringe meeting. Michael Heseltine said the mistakes from Brexit will be “high on the agenda” if Liz Truss loses the next election. David Gauke said the party had to appeal to more liberal-minded voters, and called for “at the very least a sensible debate about membership of the customs union”, to ease the damage from Brexit.

One piece of regulation which emerged from the EU, and which the Government appears keen to ditch, is the GDPR (General Data Protection Regulation). The original 2018 version of GDPR became UK GDPR in January last year, following Brexit. The Government introduced a Data Protection and Digital Information Bill in Parliament in July, which is largely based on the existing (EU) rules but contains some easements for small business. However it now appears that they intend to go further.

Culture Secretary Michelle Donelan told the conference that researchers at Oxford University had estimated that GDPR has directly caused businesses to lose over 8 per cent of their profits. She said it was not right that smaller organisations and businesses employing only a few people each are forced to follow the same one-size-fits-all approach as a multinational corporation. That is why she was announcing “that we will be replacing GDPR with our own business and consumer-friendly, British data protection system. Our plan will protect consumer privacy and keep their data safe, whilst retaining our data adequacy so businesses can trade freely. And I can promise you here today, Conference, that it will be simpler and clearer for businesses to navigate.” She said the UK would look to learn from those countries who achieve data adequacy without having GDPR, like Israel, Japan, South Korea, Canada and New Zealand.

Scottish leader calls on SNP to match UK Government tax cuts

The Scottish Conservatives are challenging the SNP-led Scottish Government to deliver the same tax cuts as Westminster.

Speaking at the conference, Douglas Ross, Leader of the Scottish Conservatives, criticised the Scottish Government for setting “the highest taxes anywhere in the UK”. He called on the Scottish Government to respond to the UK’s plan to cut the basic rate of income tax, saying he would like to see parity between the Scottish and UK income tax regimes and warning that 2.4 million people would face higher tax bills in Scotland in the absence of Scottish Government tax changes.

Ross said the reversal of plans to abolish the 45p rate of tax was the ‘right decision’. “The best parts of the government’s growth plans remain and the area that caused the most concern has gone,” he added. Responding to media questioning, he said the initial plan to abolish the rate was an ‘unwelcome element’ in a budget that had otherwise been good for growth and productivity. However political opponents branded him a ‘charlatan’ and a ‘flip flop’ for u-turning after previously saying he fully supported the budget.

Ross criticised the Scottish Government for freezing Land and Buildings Transaction Tax (LBTT) thresholds and said the Scottish Conservatives would cut LBTT to support households, saving them up to £2,100. Asked about business rates reform, Ross said his party had put forward proposals at the most recent Scottish Budget to extend relief support for small businesses to prevent them from facing a cliff edge at the end of rates relief support. He said that across the UK the business rates system was an ‘antiquated’ system in need of reform.

Ross said it was ‘excellent’ that, from an initial position of reluctance, Scottish Ministers were now working with UK ministers to secure Freeport sites in Scotland. Freeports are ‘a great levelling up opportunity’, he claimed.

Scotland Secretary Alister Jack took part in a ‘conversation’ on the main stage at the conference, where he spoke about the need to put the prospect of a second independence referendum ‘to bed’ amid a looming court battle: “I want to see us (the UK Government) win the case in the Supreme Court. I want to see us win it well because I believe the 1998 Scotland Act is very clear what was reserved and what was devolved.” Jack said that the SNP ‘perpetually banging on about separation’ was creating uncertainty for Scotland and implied that was feeding through to lower economic growth.

Two post-conference Scottish polls offer bleak news to the Scottish Conservatives, suggesting they would lose all six of their Scottish seats. However there are better tidings for them in a poll reporting that more than half of Scots would like the Scottish Government to replicate the Chancellor’s tax cuts. 55 per cent would like Scottish ministers to cut the basic rate of income tax to 19p, against 26 per cent who are opposed to the tax cut and 18 per cent who are unsure. A majority also backed plans to reverse the UK-wide national insurance increase that was implemented in April but will be abolished next month.

Conference news in brief

Dirty money

The centre-right think tank Bright Blue hosted a fringe meeting on ‘dirty money’ with speakers including John Penrose MP, who is a former UK Anti-Corruption Champion. Penrose said that while the UK was at the forefront of efforts to combat economic crime – for example on registers of beneficial ownership – an enormous amount still needs to be done. The rest of the panel agreed. Susan Hawley of Spotlight on Corruption suggested the UK has a ‘low enforcement environment’ and needs a more robust approach to anti-money laundering including a beefed up supervisor of supervisors. Tom Keatinge of the Centre for Financial Crime & Security Studies at RUSI struck a more optimistic note, saying that while ‘Britain is great for money-laundering’, the things that make this the case also give us lots of tools to tackle it – in particular the fact that we sit at the centre of vast information flows. He was also very positive about the appointment of Tom Tugendhat as security minister.

VAT

VAT hardly got a mention at the conference this year. The one exception we are aware of was Business Secretary Jacob Rees-Mogg telling a fringe meeting he accepts that the VAT threshold is a barrier to growth for some businesses. This pleased the hosts of the event, the FSB, who have called for the basic VAT taxable turnover threshold to be raised from £85,000 to £100,000 to encourage suppressed economic activity. Rees-Mogg acknowledged that the UK has more power over VAT post Brexit but said it is up to the Chancellor to deal with the tax.

Levelling Up

On 20 October 2022, UK in a Changing Europe and the Policy Institute at King’s College London are releasing a major new report exploring public perceptions of regional inequality and civic pride across England. Preliminary results of a related survey of the public show that Labour voters are more united than Conservative voters about the need for re-distribution of government spending and wealth from London. Speaking at a fringe event, Tim Montgomerie, Founder of Conservative Home, said Boris Johnson would have lasted longer as PM if he had acted more on his levelling-up agenda.

Future of the Conservative Party

At a fringe event looking at the future of the Conservative Party, Mark Harper MP said the party must stick to its ‘values’ and ‘stick by the people who elected us’. Levelling Up Minister Dehenna Davison said a desire to raise living standards gives the Conservatives a ‘moral reason’ to win the next General Election. Tim Stanley, a columnist at the Daily Telegraph, claimed Brexit would benefit social democratic political parties more than the Conservatives in the long-term and there is an unrealistic expectation among the public of government’s willingness to intervene in the economy and society because of the interventions during the pandemic. Annabel Denham of the IEA worries young people blame capitalism for climate change and the housing crisis. Alex Morton of the IEA worries that the supply-side reform pushed for by the Chancellor may not materialise before the election.

What next?

Thursday 13 October - House of Commons - Economic Crime and Corporate Transparency Bill: Second reading

Monday 17 October – House of Lords - Health and Social Care Levy (Repeal) Bill: All stages

Thursday 20 October – Public Accounts Committee questions HMRC bosses on their annual report and accounts (session postponed from September)

Monday 31 October - Chancellor Kwasi Kwarteng sets out his medium term fiscal plan alongside forecasts from the OBR

October – Bill expected to implement Stamp Duty Land Tax changes

6 November – National insurance cut takes effect

Through the autumn – announcements on plans for childcare, agriculture, immigration, planning, energy, broadband, business, financial services (see above)

15 December – Scottish Budget

December – Welsh Budget expected

March 2023 – UK Budget expected, including results of the ‘review of the tax system’

March-June 2023 – Finance Bill expected, including income tax cut and scrapping planned rise in corporation tax