Do Tory tax cuts herald return of austerity?

The threat of Austerity 2.0 is looming as Tory ministers prepare to “trim the fat” from the welfare state amid the fallout of Liz Truss’s planned tax cuts.

Following a backlash from voters and Conservative MPs, Chancellor Kwasi Kwarteng has confirmed that proposals to axe the 45p top rate of income tax, announced in his mini budget just ten days ago, are being scrapped. But spending cuts needed to pay for the government’s other tax giveaways and borrowing spree are “raising the prospect of a return to austerity”, said ITV News’ political correspondent Carl Dinnen.

Speaking ahead of the Tory party conference, which kicked off in Birmingham on Sunday, Levelling-up Secretary Simon Clarke told The Times that Britain had been “living in a fool’s paradise” but now needed to reduce public spending to help to fund the government’s £45bn worth of tax cuts. Truss ally Clarke warned that Whitehall departments would have to “trim the fat” from the “very large welfare state”.

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What is the government planning?

During the Tory leadership contest, Truss said she was not planning “public spending reductions” despite proposing vast tax cuts. But last week she said that her ministers were looking for cuts across government and that there are “plenty of areas” where taxpayers’ money could be saved.

According to The Sunday Times’ political editor Caroline Wheeler, Kwarteng has told ministers that “we have a duty to live within our means” and has ordered spending reductions in their departments.

In an approach “similar to that of the former chancellor George Osborne, who set up the public sector efficiency challenge”, Wheeler wrote, Kwarteng is also “launching a reprioritisation, efficiency and productivity review across the public sector”. This review will re-examine “existing spending commitments” and repurpose budgets to deliver the government’s “core priorities”, including growth.

Be in no doubt, Wheeler warned, “austerity 2.0 is on the way”.

The Resolution Foundation has also predicted that Britain’s public sector is heading for a replay of the austerity imposed by the David Cameron-led coalition.

Truss’s government “is likely to need to announce fiscal tightening of between £37bn-£47bn” a year in order to meet commitments to be reducing national debt by 2026-27, the independent think tank reported. The “painful” policy choices facing the Treasury include cutting public investment projects and “uprating benefits (including the state pension) by earnings instead of inflation”.

“To avoid even deeper spending cuts, the prime minister will also need to abandon her pledge to increase defence spending to 3% of GDP by 2030,” the foundation added.

The Sun reported yesterday that government insiders had confirmed that benefits “may only rise in line with earnings rather than inflation next year, as ministers look to cover the cost of the £650 energy bailout for Universal Credit claimants”.

The Guardian said that Tory MPs had “hinted at a deep unease” about spending cuts, with at least 14 “publicly expressing concern about the plans”.

Former cabinet minister Damian Green, who chairs the One Nation group of Conservative MPs, told a rally at the Tory conference that the party should always be about “helping people make the most of opportunities whatever their background”.

“If we end up painting ourselves as the party of the rich and the party of the already successful, then funnily enough most people won’t vote for us,” Green added.

What next?

An unnamed former cabinet minister described Truss as a “dead woman walking” who would not last until Christmas if she refused to U-turn on cutting the 45p tax rate, The Mirror’s political editor John Stevens reported yesterday.

Former chancellor Osborne told Channel 4’s The Andrew Neil Show that it was also “touch and go” whether Kwarteng would survive the fallout.

The chancellor’s announcement today that the much-criticised cut was being ditched “may quell some of the political criticism”, said the BBC’s chief political correspondent Nick Eardley. But Labour has warned that “the damage is done – that the increase in the cost of borrowing has already happened and that will mean higher mortgage rates”, Eardley added.

Kwarteng has promised to publish the government’s medium-term fiscal plan to get debt falling, along with economic forecasts from the Office for Budget Responsibility (OBR), on 23 November. He also aims to set out reforms to support growth, including changes to business regulations, planning rules and immigration policies.

But for now, “All eyes” will be on Kwarteng’s speech at the Tory conference this afternoon, ahead of Truss’s speech on Wednesday, said Rachel Wearmouth in The New Statesman.

“If neither manages to satisfy the markets and MPs that they have a plan to transform their fortunes,” Wearmouth warned, “their demise may only be a matter of time.”