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Tories demand U-turn on tax cuts as pressure builds on Truss

UK Prime Minister Liz Truss. (Photo: Hollie Adams / 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 a massive package of tax cuts, which forms the centerpiece of her bid to overhaul the economy.

But her comments failed to reassure rank-and-file Tories sitting subdued behind her. Many worry that her sums don’t add up without a change of course, and that if the government doesn’t show clearly how it will fund the tax cuts when it publishes a full fiscal plan on October 31, markets will again react badly.

The Bank of England has already been forced to intervene to stave off a meltdown in the government bond market, and is under pressure not to withdraw its support as planned on Friday.

Just over a month into her premiership, Truss is already in a political bind – caught between the market fallout over unfunded tax cuts, and opposition among some Conservative MPs to any cuts to public spending that would further damage the party’s standing in the polls.

A former Cabinet minister said a U-turn on tax is now inevitable, and predicted it would be announced by Chancellor of the Exchequer Kwasi Kwarteng when he makes his fiscal statement at the end of the month.

Yet abandoning chunks of her economic plan – Truss has already been forced to scrap plans to abolish the top rate of income tax – raises the question of what her premiership will really stand for if it’s not a switch to the low-tax, small-state economy she promised in the Tory leadership campaign.

Charm Offensive

On Wednesday, the Prime Minister was on a charm offensive as she tried to repair relations with rank-and-file MPs, and convince them to back her policies. She met them in the House of Commons tea room after Prime Minister’s Questions and later at a meeting of the influential 1922 Committee.

According to two people familiar with the matter, Truss told them her government is in listening mode and will consider feedback ahead of October 31. One member of Truss’s Cabinet said privately that the government is aware of the unease among MPs – though no decision has been made on any change in course.

Still, in public the government is digging in. Chief Secretary to the Treasury Chris Philp told the House of Commons there would be no reversal on the tax cuts, and echoed Truss’s earlier line that public spending would not be cut.

Yet the comments merely added to the confusion, especially as Truss’s spokesperson then told reporters that “difficult decisions” would need to be taken on public spending.

Market Turmoil

The influential Institute for Fiscal Studies estimates that the government will need to find savings of at least £60-billion, but Truss is struggling to convince markets she has a plan to do so.

The pound slumped to a record low against the dollar in the days after Kwarteng announced on September 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.

The turmoil has shattered the Tory self-image as the party of sound economic management, and the Labour Party is regularly posting record poll leads.

And even as Truss tried to calm the mood among Tory MPs, Business Secretary Jacob Rees-Mogg used media appearances to try to deflect blame for the market turmoil away from the government. He pointed to the Bank of England’s 50 basis point rise in interest rates on September 22 – which failed to keep pace with the US Federal Reserve’s 75 basis point increase a day earlier – as the cause.

It’s the type of attack used by Truss’s campaign during the leadership campaign, but which Tory MPs worry is ringing increasingly hollow after the Bank of England stepped in to calm markets after Kwarteng’s statement.

Pushing Back

Later, Rees-Mogg told ITV’s “Peston” programme that forecasts from the UK’s budget watchdog aren’t sacrosanct, and the International Monetary Fund’s (IMF’s) criticism that UK fiscal policy should be tighter is incorrect.

“I’m afraid I would never lose too much sleep about the IMF,” he said.

The comments are unlikely to reassure Tory MPs, who spent much of Wednesday – in public and private – heaping pressure on the government to abandon its approach.

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 the government would have to row back on the tax cuts.

James Cartlidge, a Tory MP who was a parliamentary private secretary to ex-Chancellor of the Exchequer Rishi Sunak, asked for reassurance that the government would explain how their tax cuts would be funded.

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 the previous administration’s plan to raise corporation tax next year – either in full or in part – rather than scrapping it.

As chancellor, Sunak had planned to raise the tax to 25% from 19% in April.

It is not only Tory MPs predicting that something has to give. A full fiscal reversal is “now our base case”, Mujtaba Rahman, managing director, Europe at Eurasia Group, said in a note published on 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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