Liz Truss, the head of the Conservative leadership, has rejected “handouts” as the best way to help households overcome the worst income squeeze in 60 years, promising instead tax cuts and sweeping economic reform.
Truss, in an interview with the Financial Times, challenged the Treasury’s “abacus economics”, insisting he would go ahead with the tax cuts despite claims they will fuel inflation, which is already forecast to exceed 13%.
The Foreign Secretary did not rule out breaking up the Treasury and pointed to the Bank of England’s use of quantitative easing and its impact on inflation, saying it was time to review the bank’s mandate.
Truss also rejected a snap general election if she is elected Conservative leader and therefore becomes UK prime minister on September 5, a move that could take advantage of a honeymoon period before the economic crisis worsens. “I can absolutely rule it out,” he said.
Asked how he intended to help households facing spiraling fuel bills this winter (the energy price cap could rise by more than £2,000 in less than a year), Truss insisted that the answer was tax cuts and supply reforms.
“Of course I’ll see what else can be done,” he said. “But my way of doing things is in a conservative way to reduce the tax burden, not handing out handouts.”
Truss has already pledged to reverse the rise in national insurance rates, introduced by his leadership rival and former chancellor Rishi Sunak, as well as the temporary removal of green fees from energy bills, worth ‘around £150 per household each year.
But economists point out that this will not cover the rise in average annual energy bills, which were limited to £1,971 in April but which some forecasts say could top £4,200 in January.
They argue that Truss’s “pro-growth, pro-business, pro-enterprise, pro-investment” policies will take time to deliver and in the meantime households face crippling hardship.
Paul Johnson, director of the Institute for Fiscal Studies, said whoever becomes the next prime minister should fund a new support package worth billions of pounds, including helping those whose incomes are too low to benefit from tax cuts.
The scale of the economic challenge that Truss or Sunak will face was outlined by Bank of England Governor Andrew Bailey this week. On Thursday, he warned of a 15-month recession, rising unemployment and a peak in inflation above 13% later this year.
Truss’s response is to prioritize long-term reforms to boost growth, including reversing Sunak’s planned rise in corporation tax from 19% to 25%, rather than short-term palliative fixes.
“I think it’s completely counterproductive to raise the corporate tax,” he said. “I think that will slow growth and make it harder to pay off the debt.”
Truss said that if elected she would stand by the budget “immediately” and reverse the entire planned corporation tax rise, a move that will blow a £17bn hole in the public finances.
The Foreign Secretary insisted he could afford a tax cut costing more than £30bn using the “room” in current fiscal forecasts, although economists believe a sharp economic downturn could wipe out it
Truss declined to discuss the “hypothetical” situation of the headroom disappearing, but insisted he would not let borrowing soar. She would stick to the current tax rule and “start paying off the debt after three years.”
He was speaking at the London headquarters of insurance company Aviva and said the city would play a “crucial role” in unlocking investment, including to boost Britain’s national energy supply.
But Truss was highly critical of the culture of the Treasury, which was run by Sunak until the former chancellor resigned last month, refusing to rule out splitting it into separate finance and economy ministries.
“I wouldn’t want to give anyone any warning on that front,” he said. Mr Truss said the Treasury was absorbed in “the abacus economics of making sure tax and spending add up”.
He said he would establish a “strong economic unit at No 10”, and suggested he would seek to exercise close control over a “strong chancellor and a very strong team at the Treasury”.
Truss’s allies have claimed the BoE was too slow to raise interest rates to control inflation. While the foreign minister defended the bank’s independence, she said its mandate should be reviewed.
“One of the issues I want to look at is the control of the money supply, and in particular the policy of quantitative easing and the impact it has had,” he said.