What would it take for Liz Truss to reverse tax cuts?

Liz Truss has rejected calls for a U-turn on her government’s fiscal plans, defending them publicly for the first time since her chancellor’s controversial mini-budget threw the markets into turmoil.

In a round of broadcast interviews on BBC local radio this morning, she described the mini-budget as “decisive action” that had to be taken, adding that as prime minister she had taken “controversial, difficult decisions” to “get the economy moving”.

The Bank of England “announced a £65bn emergency intervention to avert an economic crisis” this week, said The Times. It is a “highly unusual move” from the central bank, which began buying billions of pounds’ worth of government bonds after pension funds warned they were just hours away from “major firesales of assets at knock-down prices”, said the paper.

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The International Monetary Fund (IMF) also strongly criticised the government’s plans to implement some £45bn worth of tax cuts, warning that the measures will “likely increase inequality”.

What did the papers say?

“This is a financial crisis of the UK government’s own making,” said the Financial Times, with the paper calling on the government to “rethink its ill-conceived growth plan, and reverse a significant portion of its tax cuts”. A U-turn by the government will “carry a big political cost – but not doing so might now be even more costly”, it warned.

The government now needs to “quickly provide convincing detail” on how it plans to stabilise public finances, and “show, above all, that it is listening to financial markets”. The “ructions” caused by the government’s “cavalier” mini-budget have shown that governments “cannot flout due process, independent oversight and economic expertise”, it said. While the Bank of England can “only prop up markets for now” the task of the government is “regaining UK credibility”, which it must do “with haste”, said the paper.

The chancellor’s “first duty is to impress upon investors, businesses and consumers that he is in control of events”, said The Times. Kwasi Kwarteng can no longer wait until his planned announcement on 23 November to provide further detail on the government’s fiscal strategy, it said.

He “must make clear now that the government will take no risks with the country’s creditworthiness and that it understands the limits as well as the role of public borrowing in a crisis”, said the paper.

While a “low-tax, pro-enterprise economy is the best way to generate wealth” it has “never been a Conservative belief that tax cuts automatically pay for themselves”. And Truss’s government looks to be in “grave peril” if it “fails to speedily absorb that lesson”.

Government ministers were “divided” on Wednesday evening over whether the chancellor should “perform a U-turn” and abandon his pledges for income tax cuts, said the i news site. One senior minister told the paper that the government should abandon its economic policy and replace Kwarteng as chancellor. “The Government needs to try to gain market credibility and that requires something different. I don’t think the present plan or people will regain market credibility,” the minister told the paper.

But the chancellor reportedly has no plans to scrap the tax changes announced last week, with government insiders said to be awaiting a “more positive reaction” for a series of economic reforms to be trailed at the Conservative Party conference next week, and announced in detail throughout the autumn.

What next?

The IMF’s strongly worded statement this week made it clear it would like to see the chancellor withdraw some of his tax-cutting plans in November, but “long before that” market pressures could force Truss to change course, and see her “unpicking some aspects” of the £45bn package, “on top of the costly energy price guarantee”, said The Guardian.

Although she could “attempt to blame Kwarteng for the chaos” and force him to resign, many MPs are of the “firm belief” that it was “Truss’s mini-budget just as much as it was his”. It would also mean Truss having to find another right-hand man or woman “solid enough to reassure the markets, but willing to serve in her deeply ideological cabinet”, said the paper.

Spending cuts could be another way forward for the government’s fiscal plans, and Kwarteng has promised the markets and MPs further details on “how he plans to ensure that debt as a share of GDP is falling in the ‘medium term’, despite his vast unfunded spending plans”.

One way of making “those sums add up” is to announce spending cuts, with The Guardian speculating that the welfare budget could be a “likely victim”. Secretaries of state were reportedly asked last night to find savings in their departments where possible. But although cuts could please some of Truss’s small-state-supporting backers, “with public services, from ambulances to courts, already struggling badly, it is not obviously an election-winning approach”, said the paper.