Liz Truss, the Tory leadership frontrunner, has rejected “handouts” as the best way to help households through the worst income squeeze in 60 years, promising instead tax cuts and radical economic reform.
Truss, in an interview with the Financial Times, defied the “abacus economics” of the Treasury, insisting she would press ahead with tax cuts despite claims they will fuel inflation, 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 rejected a snap general election if she is elected Tory leader and therefore becomes UK prime minister on September 5 — a move which might exploit a honeymoon period before the economic crisis worsens. “I can absolutely rule that out,” she said.
Asked how she intended to help households facing spiralling 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.
“Of course I will look at what more can be done,” she said. “But the way I would do things is in a Conservative way of lowering the tax burden, not giving out handouts.”
Truss has already promised to reverse an increase in national insurance rates, introduced by her leadership rival and former chancellor Rishi Sunak, as well as a temporary removal of green levies from energy bills, worth about £150 per household each year.
But economists point out this will nowhere near cover the rise in average annual energy bills, which were capped at £1,971 in April but with some forecasts saying 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 that, meanwhile, households face crippling hardship.
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 income is too low to benefit from tax cuts.
The scale of the economic challenge which will face either Truss or Sunak was set out by Andrew Bailey, the Bank of England governor, this week. On Thursday, he warned of a 15-month recession, rising unemployment and inflation peaking above 13 per cent later this year.
Truss’s answer is to prioritise longer-term reforms to boost growth — including the reversal of Sunak’s planned rise in corporation tax from 19 per cent to 25 per cent — rather than short-term palliative solutions.
“I think it’s completely counter-productive to be raising corporation tax,” she said. “I think that will stymie growth and make it harder to pay down debt.”
Truss said that, if elected, she would hold a Budget “straightaway” and reverse the entire planned corporation tax increase, 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 by using up “headroom” in current fiscal forecasts — even though economists believe a sharp economic downturn could wipe this out.
Truss refused to discuss the “hypothetical” situation of the headroom disappearing, but insisted she would not let borrowing soar. She would stick to the current fiscal rule and “start paying the debt down after three years”.
She was speaking at the London headquarters of insurance company Aviva and said that the City would play “a crucial role” in unleashing 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 resigned last month, refusing to rule out splitting it up into separate economics and finance ministries.
“I wouldn’t want to give any warning to anybody on that front,” she said. Truss said the Treasury was absorbed by the “abacus economics of making sure that tax and spend add up”.
She said she would set up a “strong economics unit in Number 10”, suggesting she would seek to exert close control over a “strong chancellor and very strong team at the Treasury”.
Truss’s allies have claimed the BoE was too slow to put up 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 want to look at is the control of the money supply and particularly the quantitative easing policy and the impact that’s had,” she said.