PM insists she is not planning spending cuts as economic turmoil continues
Liz Truss has insisted she will not cut spending to balance the books as economists and the financial markets continued to question her plans.
The Prime Minister said she is “absolutely” not planning public spending reductions, but insisted taxpayers’ money will be used well.
The cost of Government borrowing increased on Wednesday while sterling fell against the euro and dollar in the latest signs of market turbulence.
Business Secretary Jacob Rees-Mogg suggested the Bank of England’s failure to raise interest rates in line with the US was driving the turmoil in financial markets rather than Kwasi Kwarteng’s mini-budget.
At Prime Minister’s Questions, Labour leader Sir Keir Starmer asked Ms Truss whether she agreed with her Cabinet colleague.
The Prime Minister did not directly respond but said the Government had acted to protect people and firms from soaring energy bills and had taken “decisive action to make sure we are not facing the highest taxes for 70 years in the face of a global economic slowdown”.
She insisted the Government is making sure “we protect our economy at this very difficult time internationally”.
“As a result of our action – and this has been independently corroborated – we will see higher growth and lower inflation,” she told MPs.
Economists have suggested that restoring confidence in the Government’s grip on the national finances will require tens of billions of pounds’ worth of spending cuts or tax rises.
Sir Keir said that during her Tory leadership campaign Ms Truss had pledged “I’m not planning public spending reductions”.
Asked if she is going to stick to that, she replied: “Absolutely… We are spending almost £1 trillion of public spending. We were spending £700 billion back in 2010.
“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.”
Despite the public commitment by Ms Truss, the Prime Minister’s official spokesman warned “difficult decisions” would need to be made on spending when asked whether the cost of the energy package would be used as cover for departmental cuts.
“We are clear there will need to be difficult decisions to be taken given some of the global challenges we’re facing,” the spokesman told reporters.
“I appreciate the interest but I’m not going to get drawn into what those might look like.”
Sir Keir called for a reversal of the “kamikaze budget”, which relies on borrowing to fund £43 billion of tax cuts intended to stimulate economic growth.
He told her: “Does she think the public will ever forgive the Conservative Party if they keep on defending this madness and go ahead with their kamikaze budget?”
Ms Truss replied: “The way that we will get our country growing is through more jobs, more growth, more opportunities, not through higher taxes, higher spending, and his (Sir Keir’s) friends in the union stopping hard-working people get to work.”
Since the September 23 mini-budget the value of sterling has fluctuated and yields on government bonds, the cost of state borrowing, rose to such an extent that the Bank of England was forced to intervene to prevent problems for pension funds.
The Bank’s governor, Andrew Bailey, confirmed the intervention will end on Friday, leading to a slump in the pound and another spike in bond yields.
The UK 30-year yield on gilts, UK government bonds, passed 5% on Wednesday morning amid growing unease among traders.
Gilt yields, which rise as prices fall, have therefore returned close to the levels which led to the Bank’s initial intervention late last month.
Mr Rees-Mogg argued it was the Bank’s interest rate decisions, rather than Mr Kwarteng’s mini-budget, which had driven the market’s response in recent weeks.
The market response was “much more to do with interest rates than it is to do with a minor part of fiscal policy”, he claimed.
On September 22 the Bank’s Monetary Policy Committee (MPC) raised rates by 0.5 percentage points to 2.25%, but the day before the Federal Reserve raised rates by 0.75 percentage points.
But economists insisted that the Government’s decision to increase borrowing without any plan to balance the books was a major factor.
Ms Truss’s commitment not to cut public spending will mean Mr Kwarteng will need to show how else he intends to get the nation’s finances under control when he presents his medium-term plan to MPs on October 31.
Deutsche Bank’s chief UK economist, Sanjay Raja, was sceptical about the Government’s target of hitting 2.5% annual economic growth, saying that will be “almost impossible” within five years.
He suggested the markets will expect a “down payment” to show how the Government intends to control finances, suggesting spending cuts or tax rises in the order of £20 billion to £30 billion will be needed as an initial step.
The Institute for Fiscal Studies has suggested that a “fiscal tightening” of £62 billion in 2026–27 will be needed to stabilise debt levels – meaning either tax rises or spending cuts.
Mr Kwarteng has already abandoned plans to cut the 45p rate of income tax for top earners but Torsten Bell, of the Resolution Foundation, told MPs on the Treasury Committee that more U-turns are needed on the mini-budget measures.
“Given where we are, in a very serious situation, I don’t think there is a credible, plausible package that’s going to work now on the 31st (of October) that doesn’t involve U-turning on more of these, because markets are going to need to see the Government saying: ‘I’ve changed course’,” he said.
The decision to abandon the 45p tax measure overshadowed the Tory Party conference and followed a revolt against the plan by Conservative MPs.
The Prime Minister will face her backbenchers at a private meeting of the 1922 Committee in Parliament later on Wednesday.
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