Liz Truss faces MPs backlash as she considers tax U-turn to balance books

By ITV News Deputy Political Editor Anushka Asthana and ITV Peston Researcher Lili Donlon-Mansbridge

It is unquestionable that the mood among Tory MPs in Parliament right now is febrile with many claiming that something has to be done. 

And this isn't just from those who backed Rishi Sunak or Penny Mordaunt. We've had Liz Truss backers ask us - "how long do you think she's got?".

But while the discussions around a change of leadership are real, many point out that there is no agreed candidate, and no mechanism (yet) - and, moreover, they want to give the PM and her Chancellor Kwasi Kwarteng, until October 31st, to try to turn things around.

That deadline - when the government publishes it's fiscal plan to show it can balance the books and get debt falling - is absolutely key.

But here is the problem. The scale of the challenge facing Ms Truss and Mr Kwarteng when it comes to the fiscal plan entirely depends - not on their arguments or theories - but the central forecast of the Office for Budget Responsibility (OBR).

That means that the PM and Chancellor can argue until they are blue in the face that their plans will eventually deliver growth, but without solid empirical evidence to show that is certain - the OBR won't hand them that conclusion in their forecast.

So it is necessary for them to fill that £62bn hole that the Institute for Fiscal Studies set out in its green budget this week.

And, while it is true that additional growth would reduce the size of that hole, in the short term they really only have two ways to fill it - increasing taxes (probably by reversing tax cuts) or cutting public spending.

The first option would require painful U-turns - with the options clear from the chart below - which uses IFS data but was made up by our graphic designer at ITV's Peston, Nik Mann.

Would they do that?

Of the £43bn worth of tax cuts, £16bn comes from reversing a rise in national insurance, and given that has literally just been passed - it seems unlikely.

Pushing back a cut to the basic rate of income tax wouldn't make much difference because the policy was already pencilled in for a year later.

The big and obvious - but very politically painful option - is the one they are clearly considering. And that is pushing ahead with a planned increase in corporation tax - or at least part of it. 

And the reason that decision needs to be on the table - is that the alternative is spending cuts that are just eye watering - as you can see in a second chart from the IFS data below.

If the government protects the NHS and defence - as promised - and then cuts 15% from every other department - they still only plug £35bn of the hole.

Taking 15% from every department means massive cuts - including in welfare - an area we've been focused on and will return to below.

And still there would be need for masses more - with the IFS modelling a 50% cut to public investment (including things like research and development) to fill the gap. That is perhaps why cuts to research and development are being rumoured in Westminster.

But given how anti-growth that would seem - perhaps it is less painful for the government to backtrack on corporation tax (which is actually only paid by a relatively small number of the biggest companies) than to impose those scales of cuts.

On benefits, the government had wanted to go hard on cuts - not only uprating Universal Credit by earnings rather than inflation - but according to some folk inside the Treasury find savings that could be worth more than £10bn.

Following pressure it sounds like they will backtrack on the uprating (as they can't get it through Parliament anyway) so what else could come?

We've been told that housing benefit - which has been frozen for the past year - will stay that way. And according to new analysis for Peston by Crisis and Zoopla, that is a massive real terms cut.

They showed how the rental prices of the cheapest 30% of properties has risen by over £100 a month since 2019 in many parts of the country and more than £150 in the south-east.

Meanwhile - in proportional terms, Yorkshire and the Humber has been worst hit - with increases of close to 25%.

These are painful decisions for a new PM who would have hoped to enjoy a honeymoon period, but appears to have lost the support of most MPs.

Although Liz Truss undoubtedly has friends in the party (and is actually well liked) she is now looking like an increasing isolated, perhaps even lonely, figure.

One MP said colleagues did not approach her when she was walking around, just outside Parliament's Commons chamber, yesterday.

Another said that the 1922 meeting - in which Rob Halfon MP accused her of ripping up the party's record representing workers, built up over a decade - was an "outpouring of despair".

A third said the reason that October 31 was key was that - "a Chancellor needs the confidence of the prime minster, the City and Conservative MPs". Without all three, they can't survive - and that would go for Liz Truss too.

So if that plan goes badly, this MP argued that the party would need to replace its leader - even if it required the 1922 to force a change in the rules.

The MP said that forcing Ms Truss out could make the party look like a laughing stock. However, they pointed to something they'd heard a commentator say - "it would be a choice between being dead or a joke".

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