Fox leads call to cull business tax

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Liam Fox has largely kept his counsel since he resigned as defence secretary last October. His intervention in today’s Financial Times is confirmation that next month’s Budget will be a titanic test of political will within the coalition.

Mr Fox’s article puts him in the forefront of those on the Conservative Right who want George Osborne to use his March 21 Budget to embark on a much more ambitious push for growth, cutting their tax burden and unshackling companies from labour laws.

Meanwhile, the Liberal Democrats want the chancellor to focus scarce resources on raising the income tax threshold further towards £10,000, a move which Nick Clegg believes is emblematic of his party’s commitment to deliver fairness in tough times.

“It’s going to be a big Budget,” says one Tory MP close to Mr Osborne. Over the coming weeks, both parties will be forced to make compromises to secure their priorities, opening up the prospect of an intriguing final package.

The final deals will be cut by the “quad”, the coalition’s highest body, comprising Mr Osborne and David Cameron on the Tory side and Mr Clegg and Danny Alexander, Treasury chief secretary, on the Lib Dem side; it has already met in private session to discuss the Budget.

Mr Osborne is touring the backbenches – he will meet with the 2020 group of Tory modernisers on Wednesday – and the message coming back is clear: Tories want more tax breaks for business and deregulation.

“If we have got to have tax cuts and if tax cuts mean reductions in spending so be it,” said Brian Binley, a senior backbencher and executive of the 1922 backbench committee. Tories are eyeing cuts to corporation tax, capital gains tax and employers’ national insurance contribution.

The party is also pushing to reopen last year’s battle with the Lib Dems over employment law, in which Vince Cable, business secretary, fought off attempts by Steve Hilton, Mr Cameron’s chief policy adviser, to remove a raft of workplace rights, including the idea that companies should be able to dismiss staff freely in return for compensation.

An uneasy compromise was brokered in which the Lib Dems agreed to look into whether rules should be relaxed for companies employing less than 10 people, although the business department has still not launched that call for evidence, despite Mr Osborne announcing the plan back in November.

Meanwhile, the Lib Dems are looking through the tax system to identify allowances and reliefs that might be scaled back or abolished in order to help the “squeezed middle” – the key electoral group targeted by all the main political parties.

One option favoured by the Lib Dems is to scale back tax relief to higher earners on their pension contributions. “We are basically trying to see what wealth taxes we can get past the Tories,” said one ally of Mr Clegg.

The Lib Dems are realistic that if they want to make substantial progress towards the £10,000 tax threshold – one of the few popular policies that voters associate with Mr Clegg – partly funded through new taxes on the wealthy, they will have to make concessions.

With little money available for any kind of tax cuts, the Lib Dems may have to concede more ground on labour regulation. David Cameron has also hinted he may need more money to ease the pain felt by families with a single higher rate taxpayer, set to lose their child benefit.

Mr Osborne wanted to craft a Budget for middle Britain – and for enterprise – but navigating through competing demands will test his political skills and coalition unity to the limit.

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