Rishi Sunak risks ‘financial crisis’ unless he raises taxes, warns Tory grandee

Chancellor should target hikes in income tax, national insurance and VAT, says Kenneth Clarke

Rishi Sunak risks a “financial crisis” if he fails to raise taxes to pay for coronavirus spending, and must be ready to increase taxes on ordinary workers and shoppers as well as big business, former chancellor Kenneth Clarke has said.

The Tory grandee said Mr Sunak should ditch a core promise of Boris Johnson’s 2019 Conservative manifesto not to raise rates of income tax, VAT or national insurance, to enable himself to start paying down the historically high £2 trillion debt accused as a result of massive borrowing to prop up the economy during the pandemic.

And he said he would scrap tax reliefs for over-65s, who currently do not pay national insurance contributions on earnings.

The chancellor has sparked a row with backbench Tory MPs by signalling that he will use his 3 March Budget statement to “level with” voters about the need for belt-tightening to pay for his £280bn package of support for jobs and businesses hit by Covid-19.

With a rise in corporation tax from 19 to 23 per cent expected next Wednesday, some Conservatives have said Mr Sunak should instead focus on extending coronavirus support and investing in growth to take Britain out of its economic doldrums.

But Lord Clarke, who is credited with leading the UK from recession to financial stability as chancellor from 1993-97, told BBC Radio 4’s Today programme that Sunak must not shy away from rises in personal taxes like income tax, national insurance and VAT.

The Tory peer - briefly expelled from the party by Mr Johnson for opposing a no-deal Brexit - said that the chancellor must extend successful elements of his coronavirus support package, like the furlough payments which cover up to 80 per cent of wages of workers who would otherwise be laid off.

But he added: “That means more spending, more debt by the government. 

“What he also has to do is start actually preparing for how he’s going to get that debt under control, how he’s going to return the burden of debt to normality, how he’s going to raise taxation.

“Every sensible person knows that this spending we’ve embarked on to stop the economy collapsing is taxpayer spending. This is the taxpayer’s debt that we’re piling up now. 

“And if we don’t actually get it under control and signal how are we going to get back to fiscal common sense before inflation comes back and interest rates go up, we’ll face a financial crisis, with the burden of paying interest on it, overseeing it and the problem of renewing it when it comes up.”

Lord Clarke said that the chancellor has scope to increase taxes on business, which remain low in the UK by comparison with other highly developed states.

But he said he would put corporation tax up “cautiously” while focusing his attention on personal taxation.

“The three main taxes - income tax, VAT and national insurance - provide more than half of the revenue, they are tied to spending and income and are progressive,” said the former chancellor. “He must look at them.”

Lord Clarke dismissed the significance of breaking manifesto promises not to hike the main tax rates, pointing out that the authors of the document had no idea of the massive economic blow which would shortly hit the country.

“I think you could explain the manifesto to any sensible person by pointing out that was written with no-one predicting anything like the Covid crisis or anything like the borrowing that the government has had to embark upon,” he said.

And he said backbenchers must be persuaded that the burden of paying for coronavirus support must fall largely on the traditionally Conservative-voting older middle classes.

“This crisis has been so unfair,” said Lord Clarke. “It has hit the poor, the young, the low-paid and the vulnerable. 

“The comfortable middle classes, the older middle class, comfortable and retired, are actually financially better off because of the crisis because their house prices have gone up, their investments have increased in value thanks to quantitative easing and they saved money which they haven’t been able to spend on their holidays. 

“I personally would make all people over the age of 65 who continue with full time work pay the same tax as people under 65.”