Sunak Should Break Vow on Key U.K. Taxes, Ex-Chancellors Say

(Bloomberg) -- Rishi Sunak should break his Conservative Party’s election promise not to raise the U.K.’s main rates of tax, two former Tory finance ministers said, as the Chancellor of the Exchequer prepares to announce his budget next month.

Speaking in Bloomberg interviews, Norman Lamont and Ken Clarke also suggested the chancellor should drop the government’s “triple lock” guarantee that increases state pensions each year as he strives to repair the economy.

The election manifesto “was not written at a time when anybody contemplated such an extraordinary historic event as this grave Covid crisis,” said Clarke, who served as chancellor from 1993-1997. “You can’t be bound by that document.”

With the U.K. deep into its third national lockdown to prevent the virus spreading, Sunak is scheduled to publish the budget on March 3 and has said his priority is protecting jobs.

‘Sacred’ Duty

But while more funding for emergency measures is likely, Sunak has also talked of his “sacred” duty to get the country’s finances in order after committing 300 billion pounds ($417 billion) to tackle Covid-19 and support businesses through the crisis. That means cutting spending or putting up taxes.

The success or failure of next month’s budget will determine whether the U.K. can make the most of its successful vaccination program to rebound quickly from its deepest recession for more than 300 years.

Economists warn that if Sunak puts up taxes or cuts spending too fast, he risks choking off the recovery. Politically, he is also hemmed in by his party’s 2019 election promise not to raise the rates of income tax, national insurance or value added tax -- the Treasury’s three biggest earners.

Lamont and Clarke were both in charge of the U.K.’s finances as the country fought to recover from recession in the 1990s. Now they say the pandemic has changed the context so radically that Sunak should ditch his election vows.

‘Mistake’

Clarke said he would raise some taxes now. “I wouldn’t put them up dramatically, but they are the major sources of revenue and are the best sources because they very much reflect either the earning capacity or the spending capacity of individuals,” he said. “You can make it a bit more progressive in difficult times.”

Lamont, who preceded Clarke as chancellor, said it is “too early” to raise taxes now because doing so would risk “aborting the recovery.” But he suggested Sunak should instead announce plans for future tax increases.

“I was faced with a continuing recession, but the economy was beginning to recover,” Lamont said. “And what I decided to do was to announce certain tax rises that would take place over the next three years. And I legislated for them so that they were real, but they did not take effect immediately. And I think some sort of strategy like that is what the chancellor needs.”

It would be a “mistake” to abide by the tax pledges, he said. “The public might understand that commitments made when times were normal in an election don’t really have a lot of relevance today and perhaps a temporary increase in one of the main taxes is inevitable.”

‘Wrong Signal’

Lamont was replaced by Clarke in 1993, and he steadily reduced the deficit over the next four years. When Tony Blair’s Labour Party won the 1997 election, he continued Clarke’s spending policies.

Lamont and Clarke, both members of the House of Lords, agreed that business taxes should not increase because a revival for companies will be vital to the U.K.’s recovery. “Raising corporation tax would send the wrong signal,” Lamont said. “We want to demonstrate that we’re open to inward investment.”

The two former chancellors also agreed the promise to raise the state pension yearly by whichever is the highest of average earnings, inflation, or 2.5% should also be dropped. Clarke said the policy is “reckless,” while Lamont called it a “mistake.”

David Gauke, a former Conservative who served as Chief Secretary to the Treasury -- the number two job in the finance ministry -- under Prime Minister Boris Johnson’s predecessor, Theresa May, said he agreed with the verdict of both peers on the twin triple locks.

‘Unfair’ Consequences

“At some point, we are going to have to raise taxes,” he said. “Without making use of the three taxes which raise 64% of revenue makes this task much harder and will force the chancellor to raise those taxes where it is economically important to remain competitive.”

The pensions triple lock “should have long been abandoned” and will have “unfair” consequences over the next couple of years because of fluctuations in earnings, Gauke said.

On other measures, Lamont and Clarke recommended extending relief to hard-hit sectors such as tourism and restaurants beyond current cutoffs in March and April.

Sunak took over last February, just a month before the economy was locked down as the pandemic ran out of control. Since then, he’s rolled out vast state programs to prop up the economy. His policies have made him the most popular member of the Cabinet, although that may change as he turns off the spending taps.

“No chancellor in my lifetime has found himself plunged into office and immediately facing the worst economic crisis,” in decades, Clarke said. “He was a very, very inexperienced politician who had to take a lot of vital decisions very quickly, and by and large I think he’s done splendidly well.”

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