Prime Minister Rishi Sunak has hinted that voters should not expect tax cuts before next year’s general election amid fears they would boost inflation.
His comments came as mortgage rates hit a peak not seen since the height of the 2008 financial crisis.
But further increases will be a blow to Tory MPs calling for pre-election giveaways, as the party continues to trail Labour in the polls.
Asked about tax cuts on the way to the Nato summit in Vilnius, Mr Sunak said: “The number one priority right now is to reduce inflation and be responsible with government borrowing. That is absolutely the overriding economic priority and that takes precedence over everything else.”
He added: “Given the [economic] context we face, we are going to make sure that we bring inflation down and we don’t do anything to make the situation worse or last longer.”
However, he reiterated his stance that he did want “to reduce taxes for people”.
On public sector pay rises and borrowing, he warned that the government should “not fuel the fire by excessive borrowing at a time when that would just make the situation worse”.
Mr Sunak also suggested that disastrous losses in three by-elections next week would not divert him from his priorities.
He said: “The message I heard loud and clear from people is, ‘Just focus on the things that matter to them and make a difference on them’.”
There was more bad news for the prime minister as mortgage rates continued to rise, passing the height seen in the wake of Liz Truss’s disastrous mini-Budget last autumn.
With the Bank of England’s recent rate hike pushing up the cost of borrowing, average two-year fixed-rate deals reached 6.66 per cent on Tuesday, according to figures from Moneyfacts.
Mr Sunak has made halving inflation to 5 per cent by the end of the year one of his five priorities in government. But it has remained much higher than predictions, at 8.7 per cent.
Mr Sunak is expected to announce a decision soon on recommendations on the wages of some public sector workers – of rises of 6 per cent or more.
While he insisted that no decisions had been made, he emphasised that when it came to pay rises the government would be “responsible”.
Tory MPs have called on the government to reject the recommendations of the pay review bodies and prioritise tax cuts instead.
Former business secretary Sir Jacob Rees-Mogg told The Sun on Sunday that tax cuts could be funded by reductions to a “far too bloated public sector”.
Meanwhile, Sir John Redwood, another former cabinet minister, said public sector spending would be more inflationary than tax cuts.
Victoria Atkins, the financial secretary to the Treasury, said the government wanted to look at tax giveaways “as soon as we can” but said it had to prioritise reducing inflation.
At the weekend, chancellor Jeremy Hunt all but ruled out any tax cuts before the election, which is expected next year.
Mr Hunt said he would “not countenance tax cuts if they make the battle against inflation harder”.
He told the Financial Times: “If we were to pump billions of pounds of additional demand into the economy when inflation is already too high, that would mean fiscal policy working against monetary policy.”
In a speech on Monday night, he added: “Working with the governor and the Bank of England, we will do what is necessary for as long as necessary to tackle inflation persistence and bring it back to the two per cent target. That means taking responsible decisions on public finances, including public sector pay, because more borrowing is inflationary. It means recognising that bringing down inflation puts more money into people's pockets than any tax cut.”
The schism within the party over tax cuts saw a Tory peer and former minister hit out earlier this week at what he said was a “significant and sizeable wing” of his own party that were “completely and utterly insane”.
Lord Vaizey picked out what he said was an “obsession” among some Tory MPs with cutting taxes and accused them of a “misreading of history”.
“It is totally barmy, this complete obsession from a wing of the Conservative Party, that you should cut taxes,” he said. “It is a significant and sizable wing that is completely and utterly insane.”
