Liz Truss, the Tory leader’s front-runner, has dismissed “handouts” as the best way to help households through the worst income squeeze for 60 years, promises tax breaks instead and radical economic reforms.
Truss, in an interview with the Financial Times, defied the Treasury’s “bullseye economics” and insisted she would push ahead with tax cuts despite claims they will boost inflation, which is already forecast to top 13 per cent.
The Foreign Secretary did not rule out breaking up the Treasury, and she took aim at 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 ruled out a snap general election if she is elected Tory leader and therefore becomes Britain’s prime minister on September 5 – a move that could take advantage of a honeymoon period before the economic crisis worsens. “I can absolutely rule that out,” she said.
Asked how she intended to help households facing rising fuel bills this winter – the energy price cap could rise by more than £2,000 in less than a year – Truss insisted the answer was tax cuts and supply-side reforms.
“Obviously I will look at what more can be done,” she said. “But the way I would do things is in a conservative way to lower the tax burden, not hand out handouts.”
Truss has already promised to reverse a rise in national insurance rates, introduced by her leadership rival and former chancellor Rishi Sunak, as well as a temporary removal of green charges from energy bills, worth around £150 a year. household each year.
But economists point out that this will fall far short of covering the rise in average annual energy bills, which were capped at £1,971 in April, but with some forecasts saying it could top £4,200 in January.
They argue that Truss’ “pro-growth, pro-business, pro-enterprise, pro-investment” policies will take time to deliver and that households face crippling austerity in the meantime.
Paul Johnson, director of the Institute for Fiscal Studies, said whoever became the next prime minister would have to fund a new support package worth billions of pounds, including helping those whose incomes are too low to benefit tax breaks.
The scale of the financial challenge facing either Truss or Sunak was outlined by Andrew Bailey, the Governor of the Bank of England, this week. On Thursday, he warned of a 15 months of recessionrising unemployment and inflation peaking above 13 percent later this year.
Truss’s response is to prioritize long-term reforms to boost growth – including the reversal of Sunak’s planned rise in corporation tax from 19 per cent to 25 per cent – over short-term palliative solutions.
“I think raising corporate taxes is completely counterproductive,” she said. “I think it will inhibit growth and make it harder to pay down the debt.”
Truss said if elected she would hold a 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 she could afford tax cuts costing more than £30bn. using “headlining” in the current fiscal forecasts – although economists believe a sharp economic slowdown could wipe this out.
Truss refused to discuss the “hypothetical” situation where the head high disappeared, but insisted she would not let the loan float. She would stick to the current fiscal rule and “start paying down the debt after three years”.
Speaking at the London headquarters of insurer Aviva, she said the city would play “a critical role” in unlocking investment, including in boosting Britain’s domestic energy supply.
But Truss was highly critical of the culture at the Treasury, which was run by Sunak until the former chancellor’s resignation last month, and refused to rule out splitting it into separate economy and finance ministries.
“I’m not going to give anybody any warning on that front,” she said. Truss said the Treasury was consumed by “cold-frame economics to ensure that tax and spending are aligned”.
She said she would set up a “strong finance unit in Number 10”, suggesting she would seek to exercise close control over a “strong Chancellor and a very strong team at the Treasury”.
Truss’s allies have argued that the BoE was too slow to raise interest rates to tame inflation. While the foreign secretary defended the bank’s independence, she said its mandate should be reviewed.
“One of the issues I will look at is the control of the money supply and in particular the quantitative easing policy and the effect that has had,” she said.