UK’s Truss vows no spending cuts as pressure builds over tax plans
- Truss is under sustained public pressure from both Tories and opposition lawmakers about her government’s handling of the economy
- British markets have been strained ever since finance minister Kwasi Kwarteng announced 45 billion pounds in tax cuts, without saying how to pay for them
Prime Minister Liz Truss reiterated a pledge not to cut public spending, as pressure mounted on her government to explain how it will pay for its massive package of tax cuts.
“Absolutely,” Truss replied when asked in the House of Commons if she would stick to her promise on spending made repeatedly during the Conservative Party leadership campaign.
“What we will make sure is that over the medium-term the debt is falling, but we will do that not by cutting public spending, but by making sure we spend public money well,” Truss said in her weekly session of Prime Minister’s Questions.
Truss’s stance leaves her and Chancellor of the Exchequer Kwasi Kwarteng increasingly boxed in over how to balance the books after last month unveiling the biggest set of unfunded tax cuts in half a century. The influential Institute for Fiscal Studies on Tuesday estimates the government will need to find savings of at least £60 billion (US$66 billion) to shore up confidence.
Speaking at a regular briefing, Truss’s spokesman Max Blain said there are “difficult decisions” for the government to make on spending, comments that will raise further questions about the prime minister’s plan.
As her Conservative Party plunges in the polls, Truss is under sustained public pressure from both Tories and opposition lawmakers about her government’s handling of the economy. The pound slumped to a record low against the dollar in the days after Kwarteng’s September 23 fiscal package, while the Bank of England was then forced to intervene in the bonds market to stave off a collapse in part of the pensions industry.
UK’s Truss defends economic plan that shocked markets
U-turn
Kwarteng is due to announce a medium-term fiscal strategy on October 31, alongside economic forecasts from the government’s independent watchdog. His deputy, Chief Secretary to the Treasury Chris Philp, buttressed Truss’s remarks telling the Commons later that the government would adhere with “iron discipline” to government spending envelopes agreed last year, while showing “spending restraint” in future years.
Ministers have repeatedly pledged to get debt falling as a percentage of economic output, but have yet to explain how they’ll do it. Kwarteng and Truss have already been forced to backtrack on one of the flagship measures announced last month – a plan to scrap the 45 per cent rate of income tax levied on top earners – and now face pressure to row back further.
“I don’t think there is a plausible credible package that’s going to work on the 31st now that doesn’t involve U-turning” on more measures, Torsten Bell, chief executive of the Resolution Foundation think tank, told the Treasury select committee. “Markets are going to need to see ‘I’ve changed course’”. He picked out the government’s cancellation of a planned corporation tax rise next year as one possible reversal.
Labour leader Keir Starmer told the Commons it was time for Truss to “stop ducking responsibility” and reverse Kwarteng’s “kamikaze” mini-budget.
“The economy’s in turmoil, people are really worried,” he said.
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Blaming the Bank of England
Mel Stride, the Conservative chairman of the Treasury Select Committee, said he thinks the government “will simply have to come forward with a further rowing back on the tax announcements.” Philp said there are no plans for any reversals on the tax cuts.
Earlier, Business Secretary Jacob Rees-Mogg tried to blame the Bank of England rather than economic policies for the financial market turmoil since the government set out its plans last month. He pointed to the 50 basis-point rise in interest rates on September 22 – which failed to keep pace with the US Federal Reserve’s 75-point increase a day earlier – as the cause.
“The pound and other currencies have been falling against the dollar because interest rates in the US have been rising faster than they have in other markets,” Rees-Mogg told BBC Radio on Wednesday. Truss then sought to blame rising interest rates on “Putin’s appalling war in Ukraine”.
The pound on Monday was up 0.7 per cent at US$1.105 as of 1:43pm – after falling below US$1.10 for the first time this month in the wake of remarks on Tuesday by Bank of England (BOE) Governor Andrew Bailey reiterating the bank will end emergency gilt purchases as planned at the end of this week
Adding to Truss’s woes, economic data on Wednesday showed output unexpectedly fell in August for the second time in three months, raising the possibility that the country is now in a recession. Her strategy has been pilloried by the International Monetary Fund, while economists have widely slammed Kwarteng’s tax cuts as inflationary, at a time when the BOE is battling to rein in prices that are rising at near a 40-year high.
The government’s plan is “a bonfire made up of unfunded tax cuts, excessive borrowing and repeated undermining of economic institutions,” Labour’s Shadow Chancellor Rachel Reeves told Parliament. “It was built and then set ablaze by a Conservative Party totally out of control. Not disrupters, but pyromaniacs. And that fire has now spread.”
Additional reporting by Reuters
