Should we trust in Truss?

Liz Truss insisted that she will be not be cutting public spending to fund tax cuts at PMQs today, sowing confusion about the content of the government’s Halloween fiscal statement.

The beleaguered PM was clear that she would stick by her Chancellor’s Kami-Kwasi budget during her tete-a-tete with the Labour leader this afternoon. But, when Keir Starmer asked if she would also stick by her leadership campaign pledge not to make public spending reductions, there was no attempt to dodge the question: “Absolutely,” Truss responded. 

This will come as a relief to much of the public, dreading a return to austerity amid a cost of living crisis, and a relief too for Tory MPs who won their seats through a commitment to “level up” red wall areas – and need the funds to do so. 

However, it is not going to reassure markets – which have been anticipating some major spending cuts in Kwasi Kwarteng’s October 31st fiscal statement. 

It begs the question, if the PM is still cracking ahead with £43bn worth of tax cuts, and not making any public spending cuts, then how does she expect to balance the books?

Truss has said that she will allow borrowing to rise over the next few years. But ultimately she is hoping that her tax cuts will boost economic growth to such a degree that they largely pay for themselves. This prospect seems increasingly unrealistic. 

Pressing ahead with all of her budget measures without spending cuts “would result in overall government debt rising steeply for several years, before only a small fall” warns Sanjay Raja, the chief UK economist for Deutsche Bank, today, adding: “I just don’t think the market would see that as credible.”

This comes on top of the gloomy report from the IFS yesterday, which forecast sluggish growth for five years, warning that Kwarteng will have to make “big and painful” public spending cuts upwards of £60bn to put the UK economy on a stable footing.

To make matters worse, new figures out today show that the UK economy shrank by 0.3% in August, due to a slowdown in manufacturing and services. And the pound has dropped to $1.097 – after the Bank of England Governor Andrew Bailey confirmed last night that the pensions funds will be on its own from Friday: the Bank will not pursue its emergency bond-buying after that. Yields on gilts rose again with mortgage rates also rising to new highs. 

There could be even further trouble ahead: the OBR’s forecast for growth is “dire”, a government source has told Harry Cole at the Sun.

Against this gloomy backdrop, will Truss go ahead with her plans?

Many are still doubtful that her spending pledge today will hold. Indeed, reports are flying that Truss has ready told the cabinet yesterday for prepare for cuts. Yet, if these reports are true, it seems surprising that the PM chose to answer Starmer’s question in such clear, unambiguous terms. 

Some have suggested Truss is being economic with the truth: if she chooses not to increase departmental budgets in line with inflation, then technically this isn’t a cut. Well, that’s one argument she could make. Yet even this possibility seems unlikely after the Treasury’s Chris Philp told MPs this afternoon that the government would stick to the last government spending review, known as SR21 – in other words, there would not even be real-terms cuts. 

Another alternative is that more humiliating U-turns are on the way. And that Truss and her Chancellor are ready to reverse – or at least delay – some more of their divisive tax cuts.

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