As the fourth Conservative chancellor in as many years to be parachuted in after Rishi Sunak resigned as a sharp critic of Johnson’s tax-and-spend stance, Zahawi is expected to face heavy pressure from the prime minister to cut taxes for to revive the economy. Zahawi is the second-richest member of parliament, after his predecessor, with an even more sophisticated business hinterland than Sunak. Amid the cost of living crisis, opponents are likely to pounce on his past as an oil industry executive who made millions from fossil fuels while an MP, as well as past ties to former Tory MP Geoffrey Archer and charging taxpayers the current for his stables. Subscribe to First Edition, our free daily newsletter – every morning at 7am. BST The new chancellor has an unenviable task of steering the economy away from recession and a persistent cost of living shock. Inflation is at its highest level since 1982 and is forecast to reach 11% in October, while the economy is expected to sink to the bottom of the global growth charts next year. High on the agenda will be tackling the cost of living emergency, public sector strikes and pay disputes, Brexit and supply chain disruption, staff shortages, rising interest rates and deep regional divisions – while taking into account one of the largest budget deficits since 1947. So far Zahawi has called for every option to be considered, arguing that he wants to be a “chancellor with evidence” who will reduce inflation and return the economy to growth. “Nothing is off the table,” he said during Wednesday’s morning show. Expectations are rising for a package of tax cuts. If Sunak met the prime minister’s demands, the logic goes, Zahawi will back down. However, such grandeur could cost the treasury billions – and could have dubious results. Possible options include cutting VAT, a policy pushed in recent weeks by Steve Barclay, who has now risen further into Johnson’s inner circle as health secretary. A cut in the current rate from 20% to 17.5% would cost the government around £18bn. Sunak opposed it, arguing that it would benefit wealthier households more while adding fuel to the inflationary fire. Another option would be to overturn Sunak’s plan to raise corporate tax from 19% to 25% from April. On Zahawi’s first morning on the job, he spoke not only of fiscal discipline but also of the importance of a competitive tax rate, language that could be interpreted as favoring repeal of Sunak’s plan. “I know that boards around the world when they make investment decisions are looking at the long term and the only tax they can compare globally is corporation tax,” he told Sky News. Sunak favored higher nominal interest rates, offset by tax breaks to encourage business investment. It was in the process of drawing up a replacement for its “super-rebate” program due to be put in place from April to cushion the rise in the key rate, with a potential price tag of up to £11bn. However, scrapping the key rate rise would cost £17 billion a year. Economists have pointed out that with George Osborne’s capital cut from 28% to 19%, business investment has continued to lag OECD countries, costing the exchequer billions and lining shareholders’ pockets. In recent months, business leaders have agreed that a change of approach to boosting Britain’s poor record on investment and productivity is imperative. However, despite supporting Sunak’s plan, they are unlikely to complain about a key rate cut. Finally, there will be questions about income tax, which is the third of the three major revenue-raising taxes for the Exchequer, along with VAT and corporation tax. Sunak had planned to cut the key rate from 20p to 19p by 2024, although he faced pressure to bring this forward. The tax burden is forecast 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 enough tax income to cover increasing public spending on an aging population, as well as the upward trend. Zahawi, if he keeps his job, will face a challenge to cut taxes in such a setting.
