Liz Truss has said the Conservatives will push ahead with tax cuts without cutting public spending, instead allowing borrowing to rise over the next few years.
Senior economists had warned on Wednesday that such a strategy, if set out by Kwasi Kwarteng in the chancellor’s fiscal plan at the end of this month, would be likely to spook investors, creating renewed market turmoil.
It is also likely to alarm a number of Truss’s own MPs. Speaking in the Commons, Mel Stride, the Tory MP who chairs the Treasury select committee, asked for reassurances that Kwarteng would reverse some of the tax rises unveiled in last month’s mini-budget if needed.
But Chris Philp, Kwarteng’s No 2 at the Treasury, told Stride this would not happen: “There are not any plans to reverse any of the tax measures announced in the growth plan.”
There had been increasing expectation that Kwarteng will announce tough spending cuts since currency and government debt markets reacted with dismay to the scale of unfunded tax cuts in his mini-budget. But speaking at prime minister’s questions, just before Philp answered a Labour urgent question on the economy, Truss surprised many MPs by ruling this out.
Keir Starmer, the Labour leader, asked Truss: “During her leadership contest, the prime minister said, and I quote her exactly: ‘I’m very clear I’m not planning public spending reductions.’ Is she going to stick to that?”
Truss replied: “Absolutely.” She did seem to qualify the answer by saying the government would not balance the books “by cutting public spending but by making sure we spend public money well”.
Answering the urgent question later, Philp said there would not even be real-terms cuts, which would happen if budgets were not increased in line with inflation. Philp told MPs the government would stick to the last government spending review, known as SR21.
He went on: “I would point out to the house that those SR21 spending limits do see real-terms increases over the three years. But we are going to be sticking with iron discipline to those spending limits, and not increasing them. And we will also show spending restraint in the years ahead. But showing spending restraint is different to real-terms cuts.”
Giving evidence to Stride’s committee on Wednesday morning, a group of senior economists warned that if Kwarteng did not announce spending curbs or a rollback of tax cuts when he outlined his fiscal plan on 31 October, markets would react badly.
Sanjay Raja, the chief UK economist for Deutsche Bank, said no such action would result in overall government debt rising steeply for several years, before only a small fall, adding: “I just don’t think the market would see that as credible.”
At PMQs, the first for more than a month and only Truss’s second since entering No 10, the prime minister gave another unexpected answer when she said she would push ahead with plans in place under Boris Johnson to bar landlords in England from evicting tenants without fault, despite strong briefings that this measure would be dropped.
Asked by Labour’s Graham Stringer if she could reassure tenants that this would happen, Truss replied: “I can.”
Much of the session was taken up by Starmer lambasting Truss over what he said was the devastating impact of September’s mini-budget on mortgage rates.
“There’s no point trying to hide it,” Starmer told Truss after the prime minister had deflected a series of questions. “Everyone can see what has happened. The Tories went on a borrowing spree, sending mortgage rates through the roof. They are skyrocketing by £500 a month, and for nearly 2 million homeowners, their fixed-rate deals are coming to an end next year. They are worried sick. They won’t forgive, they won’t forget, and nor should they.”
Asked about the tax cuts, several times Truss talked instead about the government’s scheme to cap energy bills, also announced at the mini-budget, prompting Starmer to accuse her of trying to evade scrutiny.
“Avoiding the question, ducking responsibility, lost in denial,” he said. “No wonder investors have no confidence in her government.”
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