Conservative MPs are plotting to avert a squeeze on welfare after Liz Truss and Kwasi Kwarteng were forced into a humiliating U-turn on plans to abolish the 45% top rate of income tax.
In another reversal, the Guardian understands Kwarteng will also speed up plans for a new fiscal statement, expected to focus on spending and deregulation. It will now take place later this month, rather than on 23 November as previously scheduled, accompanied by new forecasts from the Office of Budget Responsibility, in another move designed to restore market stability.
Senior MPs warned of further rebellions over reductions in public spending, especially on benefits, which the chancellor has declined to rule out.
The threat came as the Institute for Fiscal Studies (IFS) and the Resolution Foundation said there would need to be significant cuts in public spending unless there were further U-turns on policies announced in the mini-budget last month.
In a brief and abashed Tory conference speech, Kwarteng admitted it had been a “tough day” – hours after rowing back on the tax cut for high earners. He said his economic plan had caused “a little turbulence”.
Kwarteng said the government was committed to its radical agenda – and would move soon to deregulate sectors including childcare, agriculture, immigration, planning and financial services.
But he also said the government would take fiscal discipline seriously, saying they were “absolutely committed to being serious custodians of the public purse”.
Truss and Kwarteng decided to ditch the cut to the 45% tax rate the night before the conference when the scale of rebellion by MPs made it clear it would not survive a parliamentary vote – with many other tough battles to come.
Cabinet ministers said they believed it was the right decision. “I think we came into contact with the inevitable,” one concluded.
Another said there was a clear need to return to a more rigorous system of cabinet discussions and responsibility, and hinted that a shake-up of No 10 was in the works.
“We have not had true cabinet government since the days of Margaret Thatcher. That needs to change.”
But both MPs echoed economists in warning that the reversal of the abolition of the top rate of income tax would make little difference to the state of the public finances and said they were concerned about what spending cuts would need to be announced.
Mel Stride, the chair of the Treasury select committee, said there were significant issues that remained, even though the U-turn was welcome. “It may be that there will be even yet further requirements to unwind some of those positions,” he said.
The Resolution Foundation said that despite Monday’s U-turn, the richest households would still gain almost 40 times as much as poorer families from policies announced in the mini-budget.
“Unless further U-turns are made, the chancellor will need to announce significant spending cuts on 23 November. The scale of those spending cuts is largely unchanged by today’s U-turn,” the thinktank said before the date of the date of the fiscal statement was brought forward.
Paul Johnson, the director of the IFS, said there would still need to be a significant cut to spending in order to balance the books. “Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending – to social security, investment projects, or public services,” Johnson said.
One measure Kwarteng was understood to be considering is raising benefits only in line with wage growth, rather than inflation. This would mean a real terms cut in income for some of the poorest in society and would save around £5bn. Senior government sources said the option was under consideration but Truss had yet to make a call.
The chief secretary to the Treasury, Chris Philp, has also written to departments warning them they must stay within existing budgets or make efficiency savings.
One cabinet minister hinted they were wary of tightening the squeeze on the poorest and said the government would need to make “a very good case” for additional pressures on welfare in order to command support.
They suggested that although there was a case to be made on reform of some legacy benefits, most cabinet colleagues did not want to see substantial spending cuts fall on the worst off.
The former cabinet minister Damian Green said he and other colleagues would not support cuts to welfare.
“No, I wouldn’t approve of it. And no, I don’t think it would get through parliament,” he told LBC.
“And I think what we’ve learnt over the past 24 hours is that the government has gone into listening mode and realises that you can’t just push through everything you might want. And I hope that that lesson is well learned for the future.”
Former work and pensions secretary Esther McVey urged the government not to cut benefits when it swings the axe on public spending.
“It would be a huge mistake not to give a cost of living increase in benefits. What we have to do is bring people back to work and that will not be done by slashing the benefits budget. We have got to be an enabler,” she told a panel on the cost of living hosted by the Centre for Social Justice thinktank.
Across receptions and fringe events at the Conservative conference in Birmingham, MPs welcomed the U-turn but hinted further damage control was needed.
The Tory Tees Valley mayor, Ben Houchen, told a fringe event that Kwarteng should go further and reinstate the cap on bankers’ bonuses, which he scrapped in the mini-budget last month. “Even though we’ve rowed back the damage is already done – you’ve got all of the downsides of announcing that policy without actually implementing that policy,” Houchen said.
But there remained a core group of MPs and ministers who said Truss should double-down on the tax cuts plans, including a Treasury minister and one of Truss’s major campaign donors. Andrew Griffith, a city minister at the Treasury, told a fringe meeting that inheritance tax would be his top choice to abolish completely, as did Michael Spencer, a Tory peer and City financier who gave £25,000 to Truss’s successful Tory leadership bid.
As well as disquiet over spending cuts, a revolt against the government’s policy on fracking is also gathering steam. Chris Skidmore, the MP who is in charge of the government’s net zero review, admitted he was “surprised at the U-turn by Truss” but said it was a good indicator of future battles. “It means fracking’s definitely dead if she U-turned on this.”
MPs are organising behind the scenes to make a public, joint intervention to show that the government would not have a parliamentary majority for any vote on fracking. The Conservative Environment Network, which boasts 150 Tory members of parliament, is currently planning how to force a U-turn.
Both welfare changes and fracking are more difficult to defeat in parliament for MPs because changes may not require primary legislation.
Labour is planning to make fracking one of the first opposition day debates in order to force a rebellion. One Conservative minister said there was “absolutely no way we are ever going to do fracking, the parliamentary numbers don’t stack up”.
Meanwhile, two new opinion polls continued the recent trend and gave Labour a significant lead over the Conservatives, including one from Savanta Comres which put the party ahead by 25 points, the largest lead the pollster has ever record with the highest share of the vote.
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