Liz Truss Faces A Tough Political Trade-Off Between Tax Cuts And Paying For Energy Crisis
Liz Truss has promised to keep her expensive tax cuts and also help people through the cost of living crisis and stick to the current fiscal rule (Alamy)
With domestic energy bills set to hit £3,549 within weeks, Liz Truss, who is widely expected to become prime minister on 5 September, will face tough choices over whether her flagship campaign pledge to cut taxes will match the political reality of governing in a cost of living crisis.
On the one hand, Truss will be keen to remain true to the low tax, small state pledge that has won her the support of the right of the party that looks likely to propel her to Downing Street. But she will also be under pressure to step up to the scale of the crisis so as not to sacrifice the support of the general public.
“Our next government will have the difficult task of balancing the books, whilst providing meaningful support for families and businesses to meet these challenging times,” Tory Councillor Jackson Ng told PoliticsHome.
The Foreign Secretary began her battle against Rishi Sunak to enter Number 10 by promising to make cutting taxes her primary focus, over what she termed "giving out handouts” to people struggling to pay for their utilities.
By allowing people to keep more of the money they earned, she argued, they would be less in need of specific interventions from the government.
But with inflation already in double figures and predicted to soon hit an eye-watering 18%, and gas and electricity bills forecast to hit as much as £6,000 a year by April, the money people save via tax cuts looks set to be dwarfed by spiralling household expenses.
The scale of the oncoming crisis has already forced Truss to concede that she will "ensure people get the support needed", but she is yet to be forthcoming with detail, and remains insistent that she is sticking to her tax-cutting plans.
One former Cabinet minister said he detected a “squeamishness” from Truss about utilising the mechanisms of the state to offer more help, and “not wanting to offend the instincts of a lot of Conservative MPs”.
They told PoliticsHome her “comment about handouts was unhelpful”, and “smacks of a knee-jerk Conservative response to any suggestion of helping people in financial difficulty”.
“I think there's this wider point about Liz Truss' campaign, which is essentially an argument for a smaller state when we are going to be thrown into a set of circumstances where the state is going to have to play an important role,” they continued.
“These are particular circumstances, close to wartime conditions in the way that Russia is using energy policy as a way to put pressure on the West, so that is going to need an imaginative response that uses the powers of the state appropriately.”
But economists say there is no headroom left to spend more if she both keeps her tax pledges and sticks to her claim she won’t break the “current fiscal rules”, which says the UK should only borrow money to pay for long-term investment – not on day-to-day spending.
According to the Institute for Fiscal Studies (IFS), Truss will still have a £30bn buffer in the public finances that can plug the gap left by cutting the national insurance increase, temporarily scrapping green levies on energy bills and stopping a planned corporation tax rise.
Ben Zaranko, senior research economist at the IFS, said although the £30bn figure comes from March forecasts before inflation spiralled to where it is now, higher tax take and VAT receipts due to rising prices would likely offset that.
“The level of headroom might end up being more or less the same, but all of that is based on the idea that we wouldn't provide any more money to the NHS, or to schools, or to other public services, which are having their budget squeezed by inflation,” he told PoliticsHome.
"It's also predicated on this idea that there's not going to be any permanent support for cost of living.”
So although the headroom may help pay for tax cuts, there is not the money to do anything else.
“Things are so uncertain and the economic outlook is so gloomy, that if you were serious about meeting those fiscal targets you'd probably want to leave yourself some headroom, you wouldn't want to spend every single penny of it straight away,” Zaranko added.
The dilemma for Truss will be whether she can afford to keep her expensive tax cuts versus the political risk of ditching them when they have been so totemic to her campaign, and the main distinguishing factor between her and Sunak, who insisted higher taxes were currently necessary.
“There is simply no way for Truss to retain her credibility if she is immediately elected and switches to what we might call a ‘Rishi agenda’,” Henry Hill, deputy editor of ConservativeHome, said.
“The most high-profile part of that is the tax cuts, and I genuinely don't see how politically speaking she cannot push through at least some of them, which is going to be difficult because, obviously, we don't have the fiscal headroom to deliver them.”
He told PoliticsHome: “I also think it would potentially be quite bad in the long run, at least for the Conservative party, if she did that because it would leave the wing of the party that has elected her crying betrayal, again.
“It would further poison the well and it would mean that assuming the Tories lose the next general election in 2024, it would probably make the subsequent leadership contest even uglier.”
Those who are close to Truss argue that she is more ideological and dogmatic than Johnson, who has often changed tack on policy when it becomes clear that it is unpopular with the public. According to someone who worked with her at the Department for International Trade, she is almost “fanatical” in her beliefs.
But one Tory MP questioned whether the scale of the crisis might overtake everything else and force her to abandon those principles.
“I think that there is no doubt that the tax cuts that she has already announced will take place. She has been very firm in that regard,” a former Cabinet minister, who is backing Truss, told PoliticsHome.
“She has also said that there will be a fiscal event shortly after she becomes leader. At that stage, I would imagine that targeted support will be announced.”
Tory MP Greg Smith, who is also supporting Truss said he was “totally confident in Liz’s approach”.
“The only way we get the economy growing and give business confidence is to reduce the burden of taxation on individuals and companies,” he added.
“If we don’t do that, we risk recession – and that is really where Treasury revenues drop off a cliff and would mean support and services are at risk.”
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