Liz Truss has insisted she will “absolutely” not cut UK public spending to balance the books following her government’s controversial tax-cutting “mini” Budget, which blew a hole in the public finances.
Meanwhile, Downing Street also insisted that the prime minister would not perform another U-turn by scrapping those tax cuts, including the £17bn plan to reverse a scheduled increase in corporation tax.
Truss’s refusal to countenance spending cuts to balance the books — and her defence of debt-funded tax cuts — has put extra pressure on her chancellor, Kwasi Kwarteng, to show how the sums add up.
Labour leader Sir Keir Starmer told MPs on Wednesday that the government’s economic plan, which has created turmoil in the markets and led to a spike in gilt yields, was “madness” and he urged Truss to rewrite the “kamikaze Budget”.
Kwarteng has promised a medium-term debt-cutting plan on October 31, accompanied by official forecasts, which will be forensically studied by markets to assess whether he can balance the books.
In exchanges in the House of Commons on Wednesday, Starmer reminded Truss she had promised during the Tory leadership campaign not to cut public spending and asked her if that still stood. “Absolutely,” Truss replied.
“We are spending almost a trillion pounds on public spending. We were spending £700bn back in 2010. What we will make sure is that over the medium term the debt is falling.”
Chris Philp, Treasury minister, later told the Commons: “Spending restraint is not the same as real terms cuts.” He added: “We do not plan real terms cuts but we do plan iron discipline when it comes to spending restraint.”
The Institute for Fiscal Studies has calculated that Kwarteng will need a £62bn fiscal tightening to stabilise debt. On October 31 he is expected to set out his plans to put debt on a downward path in the medium term.
Truss has insisted she is sticking to existing government spending plans until 2024, but these already imply a serious squeeze on public services, which will have to find £18bn of savings to deal with inflationary pressure.
Kwarteng is expected to pencil in more spending restraint beyond the expected 2024 general election, although comments by Truss and Philp suggest the government will maintain spending totals in line with inflation.
Labour claims the spending squeeze will represent a return of “austerity”, as public services are struggling to deal with backlogs caused by Covid-19, inflation and an ageing population.
The chancellor is expected to save £5bn a year by not returning to a Tory manifesto pledge to spend 0.7 per cent of GDP on overseas aid — the level at present stands at 0.5 per cent — but finding other savings will be tough.
Some Tory MPs say Truss will have to retreat on her planned tax cuts, particularly her pledge to freeze corporation tax at 19 per cent rather than increasing it to 25 per cent in April, as planned by former chancellor Rishi Sunak.
But Truss’s spokesperson denied a report in the Independent that Number 10 staff were reviewing the fiscal statement “line by line”, including looking at the possibility of changing the corporation tax policy.
Torsten Bell, chief executive of the Resolution Foundation, wrote on Twitter: “It is increasingly clear there may be no path to a credible ‘Medium Term Fiscal Plan’ on 31st October that doesn’t include backing off some of the mini-Budget tax cuts.”
Mel Stride, Tory chair of the Commons Treasury select committee, asked Philp to confirm whether he was considering “rowing back on the tax announcements”.
But Philp told MPs: “There are not any plans to reverse any of the tax measures announced in the growth plan.”