Jeremy Hunt may well have lost the Conservatives the next election – How...and Why ?

If anyone really needed it, and despite the protestations of some analysts, I think the local election results confirm the verdict of the opinion polls that Labour are likely to win the autumn General Election, and probably with a large majority. 

Since Hunt's Budget was probably the 'coup de grace' in the Conservatives loss of popularity, I've updated this article to reflect recent developments. If we needed any confirmation that Hunt is still intent on abolishing NI, the recent 'spat' with Rachel Reeves left us in no doubt. Sunak's decision to go for a July poll will probably have little effect on the predicted result, but should at least kick the idea of abolishing NI into the long grass....

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We’re all painfully aware of the current malaise the UK is suffering in the wake of the pandemic, the cost of living crisis, etc., etc., and things don’t seem to be getting any better.

Couple this with an obviously exhausted government 'team' with a dearth of new ideas and suffering from the UK 2-party system’s electoral pendulum effect, and you can see why the Conservatives are already on the ropes, and likely to remain so.

Hunt's March budget was probably the last opportunity they had to really regain some traction against a consistent 20%+ Labour opinion poll lead. The Labour manifesto offering is still somewhat lacklustre and ill-defined, and hasn’t yet really convinced us that it can achieve the seismic shift in political ‘tectonic plates’ that we need to get Britain going again. Even if Labour's lead falters, however, Reform UK is likely to drag many erstwhile Conservative voters away from the fold, and this could allow enough Labour candidates to top their polls despite any pre-election wobbles in the party's support.

What actually happened on March 6th ? In short, Jeremy would seem to have blown it….

You would think that a party reliant on one of its main political demographics to win them elections in the past – its pensioners, and knowing they were facing electoral Armageddon within a year, would take great care to ensure this key group still felt ‘wanted’. Not a bit of it….

Not only did Hunt lower National Insurance (NI) without taking any action to reverse Sunaks’s punishing freeze on income tax thresholds in his first Autumn statement, but he added insult to injury by taking a further 2p off NI at the expense of a widely expected income tax cut. 

What’s more, he made it crystal clear then (and has confirmed it since) that his ultimate objective is to remove NI entirely so as to in his own words ‘make work pay’. Hunt's assertion that workers were being taxed twice by paying NI was also downright disingenuous - as I'll discuss shortly, NI is not a 'tax' as such, but rather a way of making an individual's pension contributions and funding their healthcare i.e. a direct investment for their later life, and their well being throughout it. 

Had Sunak not gone for a 'snap' July election, Hunt would have announced a further NI cut in an autumn statement, and reiterated his desire to abolish NI altogether. Given that Labour has been staunchly against NI abolition, pensioners can now rest a little easier, but they should still be wary of further income tax rises at the hands of Reeves, and possibly more stringent means testing of so far 'universal' benefits such as free prescriptions and off-peak  bus travel.

To get an idea of how insulting and worrying the NI abolition would have been for pensioners, and indeed anyone still working with a substantial NI contribution record, we need to look in more depth at how NI came about and what it was intended for.

NI was introduced immediately post war in the late 1940s, and was designed specifically to fund both the state pension and the new NHS. It has, by and large, been a fair and reasonable way of funding these two important state provisions, and has served us well until recently when spiralling health costs supervened to leave 'black holes' in the funding of both provisions. 

Under the current system, as wage earners, we all pay compulsory NI contributions throughout our working lives on our earnings, and these are calculated as a percentage of our wages above a certain threshold. This has always been a compulsory deduction with no opt-outs, and continues until we reach retirement age (currently 66), at which point we stop contributing. 

Our basic state pension is then assessed on the basis of our lifetime NI contribution record and a weekly sum awarded. The important thing here is that our annual pension amount is then fixed and cannot be increased (other than via the standard annual inflation-related increments awarded each April).  In recent years, NI's revenues have actually been used for many other purposes and are no longer ring-fenced as they were initially, but its important contributory principle towards our personal healthcare and pension provision still stands.

Reducing or even abolishing NI, as Hunt and Sunak have already stated they intend to do, would go against this important conservative principle. It would also leave a sizeable hole in tax revenues and would have to be replaced by equivalent cash from another source. Although exact figures are predictably in short supply, a rough estimate based on the quoted cost of the 2p cut of 11 billion p.a., the remaining 8p would set the treasury back by a whopping £44 billion. (The recent pre-election 'promise' of a selective rise in the income tax basic rate threshold for pensioners in line with the triple lock would cost another £2Bn, and would give them a paltry couple of hundred a year extra. For most pensioners, this extra pittance will be dwarfed by the effects of the 5-year threshold freeze. The only fair measure for those who have worked for their country all their lives and supported the young would be to exempt the state pension from calculation of the tax allowance altogether i.e. raise the threshold to ca £22k for a £10k p.a. state pension.)

Many pundits are already quite reasonably asking where this stratospherically large slice extra funding every year would come from.....even archetypal 'tax and spenders' Labour admit that their estimate of £46 billion annually would be impossible to fund realistically as things stand. 

Borrowing enough to cover it is definitely out – quite apart from the Conservatives' own self-imposed fiscal rules, the Markets would just not allow it. When Liz Truss had the temerity to sanction Qwarteng’s abolition of the 45% tax band in 2022, which would only have lost a 'paltry' billion or two  in revenues to the treasury, our economy was virtually trashed by the financial Markets as a punishment, so no Government will ever try that sort of un-costed borrowing again. 

This leaves only one possibility at a time of economic stagnation and chronically low global growth – yes, you guessed it, higher taxes.....

In practice, only a hefty additional income tax increase, on both basic and higher rates, would bring in the necessary funds, given most other tax-raising avenues are already ‘maxed out’, and are in any case too variable year on year. Income tax thresholds are already frozen, so short of actually reducing them further, which I suspect not even a cash-hungry government in its death throes would dare to do, no additional room for any help there.

This means that the burden of pension and health service funding would then be dumped back on the shoulders of all of us, including the very folks who had already supported it over their working lifetimes and therefore quite rightly feel they have already ‘paid their dues’. Estimates vary as to the hike in income tax that would be necessary to cover the £46Bn 'hole', but a reasonable estimate being quoted is an increase of 8p in the pound on the basic rate to 28p. That assumes of course that the higher rate stays at 40% and the thresholds remain frozen until 2028.

This would be manifestly unfair to our pensioners, and indeed to anyone well into their working lives with a substantial NI contribution record. It would also be likely to widen the inter-generational divide. Hunt's proposal has by no means gone unnoticed, and there has already been a furious reaction from pensioner groups, which is a good indication of 'trouble at t'mill' for the Tories. 

There is also another issue of principle with a Tory government considering abolishing NI. Conservative (with a small ‘c’) doctrine suggests that the contributory principle should always be upheld when it comes to pensions (and health) – i.e. we should treat NI as an investment in our own personal future rather than expecting a 'free' handout from the state. In short, there's no such thing as a free lunch.....or a free pension.

The sizeable increase in income tax that would be necessary in itself to fund the measure would also drag even more low earners into tax, and no doubt add several more million to the growing band of disgruntled 40% taxpayers. Any government which imposed it on a UK population would be in serious trouble with their electorate. 

The two successive NI reductions we've seen so far have done little in themselves to benefit low earners – in fact calculations that appeared post-budget indicate that anyone earning less than £15k will actually be worse off when tax threshold freezes are taken into account. 

Higher earners are also unlikely to fall for Hunt’s ‘con trick’ as it's already been dubbed, since they will realise that any small financial benefit they might accrue in the next few months from reduced NI will be dwarfed by the hit they will take from future new income tax increases and the extra burden they are already feeling through Sunak’s tax threshold freeze. 

That, and the recent non-Dom tax status abolition*, will also ‘put the tin hat on it’ for a sizeable number of our higher earning immigrants.  Those not already committed to staying in the UK will most likely move on to pastures new…small wonder then that many of our newly qualified 'international' medics are moving abroad in droves….not good news for us as an ageing nation, or for the treasury which will lose out on their tax revenues. So much for encouraging new blood to revitalise our economy....

Thus Hunt, presumably at Sunak's direction,  has not only alienated his primary demographic supporter group, pensioners, but has also done nothing to help the lower paid, and has also now withdrawn the cost of living payments which have kept many of them afloat over the past couple of years. He will also have deterred the very group of young entrepreneurs we need to kick-start our languishing productivity.

How has all this gone down with the wider public ? 

The post-budget commentaries from ‘the man in the street’ indicated a marked degree of disappointment – most felt another 2p off NI would make little difference to their budgets, which were already being ravaged by high mortgage and rental payments, other cost of living increases and the increases in tax resulting from the threshold freeze. Indeed, most of those interviewed showed much more concern about about the state of public services and the near bankruptcy of local government that Whitehall has presided over in recent years.

In short, an apparently stupendous  political ‘own goal’ if ever there was one. At first reaction, Starmer will have been delighted at his apparent good fortune.

But why have Hunt and Sunak really done this ? It's difficult to see how either of them could make such an apparently politically suicidal mistake unless there were an ulterior motive behind it. They are after all 'blessed' with many political advisors, and surely not all of these would have got it wrong....

Although I’m not generally one to take much notice of conspiracy theories, here’s one that does make some sense of it all:

Sunak will have realised already that he faces a long spell in opposition (presumably on the back benches as is the customary fate of an ex PM after an election loss) even if he manages to hold onto his seat at the election. His party, once in opposition, will need to re-group and then need to convince its conservative supporter base that it has returned to true conservative principles and policies before it stands any chance of re-election. This apparent loss of conservatism is arguably one of the main reasons why they have become so unpopular since Boris left Downing Street, and are almost certain to lose the election. 

A realisation that this renewal process must occur, together with a clear-out of the 'old guard', has probably already dawned across the party - witness the number of Tory MPs not intending to stand again this time round, and the phalanx of others busy brushing up their CVs. In essence, the new  party in opposition will need to learn how to be true conservatives again before they can hope to entice back their disillusioned conservative voters - many of whom will find it very difficult to forgive them for their incompetence this time round.

If Sunak (or indeed his replacement) still has aspirations of the party returning to government within the next 10 years, they will want to reduce the credibility of the new Labour administration and sow the seeds of internal strife as far as they can in the run-up to the change of government. He will be well aware of the potential for internal ideological strife within Labour, and the renewed battle Starmer faces with the left once he takes power. Sunak's prime objective in the coming months will therefore be to set as many political 'IEDs' as possible for the incoming Labour administration before he leaves office.

Abolishing NI may indeed be one such IED, and if you think about it, could be quite a clever and potent one. Starmer may indeed already have fallen into the first part of the trap by promising not to reverse any tax cuts made by the Tories before the election. 

This was a rather rash knee-jerk promise that could well come back to bite him when the ongoing impact of the threshold freezes, and any income tax increases made to substitute for NI reduction or even abolition on the electorate really kick in. Starmer will not find it easy to back-track at that point, and his regime could suffer a rapid loss of popularity as a result. This could in turn precipitate a Momentum ‘coup’ - I’ll be discussing this shortly. 

The other key issue abolishing NI would raise is how we fund pensions and the NHS going forward. The NHS funding revolution, which must eventually come, (and arguably has already started) will be a particularly tough nut for any government to sell to the electorate  (see recent blog on the the fate of the NHS) and Sunak would achieve a real coup by forcing Labour to address this in their first months in office.

The surprise defection of Natalie Elphicke to Labour on May 8th has also cast an interesting light on inter-party rivalry, and may not have been as surprising to the Conservative camp as it certainly was to the Labour ranks. If so, it would confirm a covert 'dirty tricks' campaign. Ms Elphicke has a reputation for adopting a political viewpoint only slightly to the left of Genghis Khan, and has a less than lily-white personal family history, so many labour MPs are wondering what on earth possessed central office to admit her to their ranks. At the very least, Starmer's seemingly unquestioning acceptance of his latest new recruit will sow the seeds of dissent in the party, and give the Momentum 'remnants' some further ammunition (see below for the significance of this). The term 'trojan MP' may well become currency in the near future if and when Elphicke proves toxic to Starmer's election prospects - personally, I doubt whether the Tories in their present state would be capable of thinking up such a devious ruse - but politics never ceases to amaze nowadays... 

Whatever the truth or otherwise of this quite plausible theory, I’d recommend any pensioner or worker in their 40s or older still considering voting conservative this time to think very carefully before letting the current government loose again for another 5 years without an enforced visit to political 'rehab'. 

Not that the alternative Labour offering looks particularly inspiring as yet, but at least their taxation policy is likely to be overt rather than ‘by stealth’, and is likely to be relatively moderate as Labour taxation policies go (at least while Reeves remains in charge!). We've all had enough of government 'sleaze' over the past few years and some honesty about our chronic debt problems would certainly provide a breath of fresh political air...

The real worry many of us still have with electing Labour, however, particularly with the predicted large majority, is what happens after Starmer actually gets into #10. The Momentum ‘serpent’ which Starmer has fought tooth and nail to excise from his party since the Corbyn era is undoubtedly still there, as is the strong political and financial influence of the more militant trade unions. Although Momentum has so far wisely 'kept its powder dry', and is effectively in sleeper-cell mode within Labour ranks pending an election victory, minor eruptions do surface from time to time and serve as a warning of the battle to come (Elphicke's recruitment may be one of them). A large intake of new Labour MPs would also leave plenty of room for the hard left to recruit sympathisers and support their takeover of power. Given the 'election fever' now gripping the country, I'm surprised nobody has yet challenged Starmer directly on whether he can guarantee Momentum has been completely expunged from Labour and cannot return once he reaches Downing Street. The answer, I suspect, might be quite revealing....

Will Starmer have the popularity and strength of leadership to avoid being ousted by Momentum and the unions when they awakens once again and the knives come out ? 

Unfortunately we will not know the answer to this important question until it’s too late….

The take-home message for election day, I think, has to be:

 "..be careful what you wish for - if you vote for a Labour landslide, you may well get one....and then find the ground disappears from under your feet. That, after all, is what landslides do....."

Happy voting….

Footnote: * Re the non-dom tax abolition, closer scrutiny of the rules reveals that there are many loopholes in the legislation which are likely to ensure that the very richest of those affected are able to protect their cash....what a surprise!. Expect Labour to close these loopholes promptly if elected.

First published 8.3.24