For Liz Truss, ditching tax cuts was the easy bit. Now the hard work begins

Ditching her tax cuts, however painful for Liz Truss, was the easy bit. Now the government must find up to £40bn of public spending cuts, or a combination of cuts and tax rises, a week after Truss told the Commons she would not reduce spending.

There were tensions at yesterday’s cabinet meeting after Jeremy Hunt told his colleagues they would all have to make savings. Sources described a “lengthy discussion” – Whitehall code for a row. The chancellor wants a savings figure for each department by Friday, so the Office for Budget Responsibility can factor in the cuts when it gives its all-important verdict on his medium-term fiscal plan on 31 October.

This is not a traditional “Treasury versus the rest” negotiation. Truss’s weakness means Hunt’s writ will run. Yet there is a danger now that the government leaps from the frying pan into the fire.

Cuts could prolong the looming recession – normally, a time when state spending would rise to cushion the impact on people. The scope for another round of austerity is much more limited than when George Osborne lopped about £30bn off spending in 2010. It was much easier then after years of proper investment under New Labour. Low-hanging fruit, like raising benefits in line with the consumer prices index rather than the (higher) retail price index, has long been picked.

Some services have never caught up since Osborne’s cuts, and the Covid pandemic has added more backlogs. Even Treasury hawks like Steve Barclay, briefly health secretary this summer, found there was no fat to cut. So talk of our old friend “efficiency savings” won’t make the government’s sums add up any more than the illusion Truss could magic up 2.5 per cent annual growth. If Hunt protects the NHS and education, then cuts to other budgets will be deeper.

The chancellor’s other headache is winning the backing of mutinous Tory MPs for individual cuts. Different groups will oppose specific measures. “It is going to be easy to find 40 Tories to threaten [to vote against] several ideas on the table,” one former cabinet minister told me.

Many Tory MPs are very worried about plans to raise benefits, including the state pension, by less than today’s 10.1 per cent inflation figure, which in normal times would set next April’s increase. With even Tories with big majorities fearing for their seats, backbenchers have no desire to alienate their natural supporters among the over-60s. They also fret about real-terms cuts to other benefits in the middle of a cost of living crisis.

Although Hunt regrets not protecting social care while he was our longest-serving health secretary, he may now squeeze it. The signs are he will delay for a year the lifetime £86,000 cap individuals will pay towards their care costs.

Perhaps Hunt is allowing the media to paint it black so his fiscal plan does not look so harsh on the day – “rolling the pitch” in a way Kwasi Kwarteng fatally did not before his tax-cutting mini-Budget.

But I doubt Hunt is playing such games: the black hole in the public finances is real, so the only question for him is where the cuts will fall. It will be hard to square such measures with his promise to protect those who need it most and bring back “compassionate conservatism”.

Truss is clinging to her one remaining big pledge in the Tory leadership election – to boost defence spending from 2 per cent to 3 per cent of GDP by 2030. Again, this advertises her weakness, because Ben Wallace, the defence secretary, and his deputy James Heappey, made clear they would quit if the promise were ditched. However, the Treasury will try to “backload” the rise towards the end of the decade, ripping up Truss’s pledge to raise the budget to 2.5 per cent of GDP by 2026.

Despite Russia’s invasion of Ukraine, I doubt voters will understand a big hike in defence spending while public services are reduced in what will feel like Austerity 2.0 when prices, energy bills and mortgage costs are rising.

Crucially, every single cut will be blamed on the shambolic mini-Budget, even if it might have happened anyway. Labour will hardly need to say it; voters will already believe it.

In a key election dividing line, the Tories will argue that you can’t have strong public services without a strong economy. Labour will argue the opposite. As Keir Starmer told the Labour conference: “Strong public services are the foundation of a successful economy.”

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There was a time when the Tories could have won this argument – for example, during the Thatcher era and after the 2008 financial crisis. But the public has moved on. The latest British social attitudes survey shows more people want the government to increase taxes to spend more on health, education and benefits than want to see taxes and spending cut or left at their current level.

Truss’s Tory critics acknowledge the role of an active state in hard times, as even a fiscal conservative in Rishi Sunak rightly accepted during the pandemic. Indeed, public expectations of government intervention have been raised by Covid.

No matter who leads them, the latest battle over spending cuts is not one the Tories can win.