Truss Faces Mounting Tory Pressure To U-Turn On Her U.K. Tax Cuts
Liz Truss is facing calls from within her Conservative Party to backtrack on key pieces of her economic plan.
(Bloomberg) -- Liz Truss is facing calls from within her Conservative Party to backtrack on key pieces of her economic plan, even as her UK government tried to downplay its part in the recent turmoil in financial markets.
In her weekly session of Prime Minister’s Questions, Truss sought to allay concerns that she would cut public spending to pay for her massive package of tax cuts, which forms the centerpiece of her bid to overhaul the economy.
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But that failed to persuade rank-and-file Tories sitting subdued behind her, who worry that her sums don’t add up and that when the government publishes a full fiscal plan on Oct. 31, markets will again react badly.
The influential Institute for Fiscal Studies estimates the government will need to find savings of at least £60 billion ($66 billion), leading to speculation Truss intends to cut spending. Many Tories fear that will see public services cut, a move that will likely anger voters and boost the poll-leading Labour Party.
Changing Course
Speaking on condition of anonymity, one former minister said Truss needs a complete course correction, including scrapping a 1-penny reduction in the basic rate of income tax and proceeding with a previously-planned rise in corporation tax next year -- either in full or in part -- rather than scrapping it. Under former Chancellor of the Exchequer Rishi Sunak’s schedule, the tax was set to rise to 25% from 19% in April.
A former Cabinet minister said a U-turn is now inevitable, and will likely be announced by Chancellor of the Exchequer Kwasi Kwarteng on Oct. 31.
On Wednesday, Chief Secretary to the Treasury Chris Philp told the House of Commons there would be no reversal, and echoed Truss’s early comments about the need for fiscal discipline.
Yet speaking privately, one Cabinet minister was less emphatic, saying the government is aware of the unease among MPs, though they added that no decision has been made on any change in course.
Boxed In
The growing unrest is a sign of the political bind facing Truss, who is struggling to unite the Conservatives behind her economic plan and faces an uphill battle to restore the government’s credibility with the markets. She has already had to abandon plans to cut the top rate of income tax when it became clear she didn’t have the party’s support for the move.
The pound slumped to a record low against the dollar in the days after Kwarteng announced on Sept. 23 the largest package of unfunded tax cuts in half a century. The Bank of England was then forced to intervene in the bonds market to stave off a collapse in part of the pensions industry.
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The central bank is due to end that intervention on Friday, which may put further upward pressure on UK government borrowing costs.
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 the to the 50 basis-point rise in interest rates on Sept. 22 -- which failed to keep pace with the US Federal Reserve’s 75-point increase a day earlier -- as the cause.
But Mel Stride, the Conservative chair of Parliament’s Treasury Select Committee, said in the House of Commons there are “many” in the party who think it is “quite possible” the government would have to row back on the tax-cuts.
Funding Questions
Robert Largan, another Conservative MP, asked if the government was considering delaying any of the tax measures. James Cartlidge, a Tory MP who was a parliamentary private secretary to Sunak, asked for reassurance that the government would explain how their tax cuts would be funded when it publishes its medium-term fiscal plan on Oct. 31.
A full fiscal reversal is “now our base case,” Mujtaba Rahman, managing director, Europe at Eurasia Group, in a note published Wednesday. A U-turn or delay of more tax cuts now has a 60% probability, with options including a staggered increase in corporation tax and a one-year delay in the cut to the basic rate of income tax, Rahman said.
The sentiment was echoed by Torsten Bell, chief executive of the Resolution Foundation think tank, who told the Treasury select committee on Wednesday that a change of direction had to happen.
“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,” Bell said. “The markets are going to need to see ‘I’ve changed course’.”
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