Should he remain in the job for longer than some political commentators expect, Nadhim Zahawi faces a balancing act as chancellor. He must walk the line between doing what it takes to prevent the political implosion of Boris Johnson’s government, and dealing with the worst succession of economic shocks to hit Britain since at least the 1970s.
As the fourth Conservative chancellor in as many years, parachuted in after Rishi Sunak resigned with a stinging critique of Johnson’s devil-may-care attitude towards tax and spending, Zahawi is expected to face heavy pressure from the prime minister to cut taxes to revive the economy.
Zahawi is the second richest MP in parliament, after his predecessor, with an even more complicated business hinterland than Sunak. In the midst of the cost of living crisis, opponents are likely to jump on his past as an oil industry executive who earned millions from fossil fuels while an MP, as well as past links to the former Tory MP Jeffrey Archer, and billing taxpayers for the electricity for his stables.
The new chancellor has an unenviable task of steering the economy clear of recession and a persistent cost of living shock. Inflation is at the highest since 1982 and forecast to reach 11% in October, while the economy is expected to plunge to the bottom of global growth league tables next year.
High on the agenda will be tackling the cost of living emergency, strikes and public sector pay disputes, Brexit and supply chain disruption, staff shortages, rising interest rates and deep regional divisions – all the while bearing in mind one of the biggest budget deficits since 1947.
So far Zahawi has called for every option to be considered, arguing that he wants to be an “evidence-led chancellor” who bears down on inflation and gets the economy back to growth. “Nothing is off the table,” he said during the Wednesday morning broadcast round.
Expectations are growing for a package of tax giveaways. If Sunak faced down the prime minister’s demands, so the logic goes, Zahawi will relent. However, such largesse could cost the exchequer billions – and could have questionable results.
Possible options include cutting VAT, a policy pushed in recent weeks by Steve Barclay, now elevated further within Johnson’s inner circle to health secretary. A cut in the current headline rate from 20% to 17.5% would cost the government about £18bn.
Sunak opposed this, arguing it would benefit richer households most while pouring petrol on the inflationary fire.
Another option would be to reverse Sunak’s plan to raise corporation tax from 19% to 25% from April. On Zahawi’s first morning in the job he spoke of not only fiscal discipline but the importance of a competitive tax rate, language that could be interpreted as him being in favour of scrapping Sunak’s plan.
“I know that boards around the world, when they make investment decisions, they’re long-term, and the one tax they can compare globally is corporation tax,” he told Sky News.
Sunak favoured higher headline rates, offset by tax reliefs to encourage business investment. He was in the process of drawing up a replacement for his “super deduction” scheme that would be due to come in from April to cushion the rise in the headline rate, with a possible price tag of up to £11bn. However, scrapping the rise in the headline rate would cost £17bn a year.
Economists have pointed out that under George Osborne’s cut in the headline rate from 28% to 19%, business investment continued to lag OECD countries, while it cost the exchequer billions and lined the pockets of shareholders.
In recent months business leaders agreed that a change in tack was warranted to boost Britain’s poor track record of investment and productivity. However, despite backing Sunak’s plan, it is unlikely they would complain about a cut in the headline rate.
Finally, there will be questions about income tax, which is third out of the big three revenue-raising taxes for the exchequer, alongside VAT and corporation tax. Sunak planned to cut the basic rate from 20p to 19p by 2024, although he faced pressure to bring it forward.
The tax burden is predicted to rise to the highest levels since Clement Attlee was prime minister in the 1940s. Many economists say this is the inevitable consequence of Brexit and a Covid-weakened economy failing to generate sufficient tax income to cover rising public spending for an ageing population, as well as levelling up. Zahawi, if he keeps his job, will face a challenge to cut taxes against such a backdrop.
