Liz Truss is braced for a fresh rebellion over her economic plans with senior Conservative MPs threatening to vote against the UK prime minister if she decides to cut benefits in real terms next spring.
Truss is looking at raising benefits in line with average earnings growth rather than inflation, a controversial move that has raised concerns over the effect on the cost of living crisis.
Average earnings growth including bonuses was 5.5 per cent between May and July, according to the most recent figures from the Office for National Statistics, while inflation is almost twice as high, at about 10 per cent.
The move is part of an attempt by the government to tighten public spending to reassure financial markets after sterling and gilt prices fell in the aftermath of its “mini” Budget last month, which featured £45bn of unfunded tax cuts.
But Truss, who has already been forced into one U-turn this week — dropping her controversial scrapping of the top 45p rate of income tax — is now under pressure from some MPs to change course on her benefits plan.
Penny Mordaunt, leader of the House of Commons, became the first cabinet minister to speak out against the policy in an interview on Tuesday morning. Mordaunt said it “makes sense” to increase benefits in line with inflation.
“I’ve always supported — whether it’s pensions, whether it’s our welfare system — keeping pace with inflation. It makes sense to do so. That’s what I voted for before,” Mordaunt told Times Radio.
“We want to make sure that people are looked after and that people can pay their bills. We are not about trying to help people with one hand and take away with another.”
Asked about the benefits issue, Truss said in a pre-recorded interview on Radio 4 on Tuesday morning that the government would have to make decisions to bring down debt as a proportion of GDP. “I’m very committed to supporting the most vulnerable,” she said, pointing out that the government was giving £1,200 payments to millions of low-income households to help with rising fuel bills.
“But we have to look at these issues in the round, we have to be fiscally responsible, and I’m absolutely committed to doing that,” she said.
Downing Street believes it would not be fair to give people on benefits increases of 10 per cent when wages in the public and private sector are rising much more slowly.
However, Truss has committed to keeping the pension “triple lock” under which pensioners will see payments rise by whichever is highest out of inflation, average earnings growth or 2.5 per cent. “When people are on a fixed income like pensions, it’s quite hard to adjust. I think there’s a different situation for people who are in the position to work,” she told LBC.
Damian Green, former deputy prime minister, said that he and other MPs would not vote for the benefits policy in the House of Commons.
“No, I wouldn’t approve of it. And no, I don’t think it would get through parliament,” he told LBC.
“And I think what we’ve learnt over the past 24 hours is that the government has gone into listening mode and realises that you can’t just push through everything you might want. And I hope that that lesson is well learned for the future.”
There are 5.7mn people receiving universal credit, the main benefit payment, in England, Scotland and Wales. The Institute for Fiscal Studies, a think-tank, has estimated it would cost £7bn next year to link UC to inflation rather than earnings
Mel Stride, chair of the Treasury select committee, told the BBC he did not know if he could vote for the real terms benefits cuts. “I’d need to see all the details, I’d need to see it in the round, but I’d have to think long and hard about that,” he said.
The last uprating to benefits was only 3.1 per cent in April because inflation had been low the previous September, Stride pointed out.
“So we’re coming off the back actually of a kind of quite a strong real-terms squeeze on those benefits already so I think that will be a really tough call to make,” he said.
Truss said she had been right to reverse the scrapping of the 45p tax rate because it was “becoming a distraction” given that it was only a small part of a package that also included tens of billions of pounds of expenditure on helping people with energy bills.
UK markets have steadied following the government’s U-turn on Monday. The pound rose 0.6 per cent on Tuesday to its highest point in a fortnight against the dollar, touching $1.14. The yield on 10-year government debt, which rises when prices fall, fell by 0.09 percentage points to 3.86 per cent, as traders wait for more details on how the government will fund its fiscal plans.
Additional reporting by Delphine Strauss and Ian Johnston