Liz Truss stressed she must take a “responsible” approach to the public finances, refusing to rule out real-terms cuts to benefits as she faces a Cabinet split and a fresh battle with Tory rebels.
The Prime Minister is refusing to rule out a return to austerity or say whether welfare payments will be increased in line with soaring inflation.
Critics who forced a U-turn over the plan to abolish the 45p tax rate for top earners are now stepping up pressure on the Government to confirm benefits will be raised.
Commons Leader Penny Mordaunt has publicly backed increasing them in line with inflation so that people can pay their bills, warning many Tory colleagues have backed that before.
Downing Street has not denied suggestions that Ms Truss could resist rebels’ pressure to instead increase benefits in line with earnings, which are far lower than inflation.
Chancellor Kwasi Kwarteng has already made a second change of course to reassure markets and Tory rebels by bringing forward his medium-term fiscal plan along with independent forecasts.
Ms Truss has committed to increase pensions in line with prices but on benefits said “we have to be fiscally responsible”.
In response to Ms Mordaunt’s comments, the Prime Minister said no decisions had yet been made.
During a visit to a construction site in Birmingham, she told broadcasters: “On the subject of benefits we have not yet made that decision.
“Of course there will be discussions about the way forward on commitments like benefits.”
Asked if she was listening to the Cabinet minister, Ms Truss said: “I’m very clear that going into this winter we do need to help the most vulnerable.
“In addition to the energy price guarantee we’ve also made sure the most vulnerable households have an extra £1,200 and this Government will always help people get on in life, whilst making sure the most vulnerable are protected.”
Benefits are usually uprated in line with the consumer price index (CPI) rate of inflation from September, with the rise coming into effect the following April.
The Institute for Fiscal Studies estimates that each percentage point rise in CPI adds £1.6 billion to welfare spending.
In an interview pre-recorded on Monday, Ms Truss told Tuesday’s BBC Radio 4’s Today programme: “We are going to have to make decisions about how we bring down debt as a proportion of GDP in the medium term…
“So we have to look at these issues in the round, we have to be fiscally responsible.”
Ms Truss conceded her start in No 10 has not been ideal, saying: “Is everything the Government (has) done absolutely perfect? No it’s not. I fully acknowledge that.”
While acknowledging it is a “challenging role,” she told broadcasters she is enjoying the top job.
Asked how she could deliver her policy pledges in the face of opposition from a significant cohort of her own MPs, Ms Truss insisted her Government will “continue to deliver”.
Earlier, when pressed on why she has committed to increasing pensions but not benefits, she told LBC radio: “What I mean is when people are on a fixed income, when they are pensioners, it is quite hard to adjust.
“I think it’s a different situation for people who are in the position to be able to work.”
Asked if she will rule out austerity, she said she has committed to reducing debt as a proportion of national income over the medium term.
“Well, I wouldn’t use the term you describe. What I’m talking about is fiscal responsibility,” she added.
Ms Truss sought to take some of the pressure off Mr Kwarteng as he faces criticism for the doomed plans to axe the 45% tax rate on earnings over £150,000.
She insisted that “we worked on it together” when questioned whose idea it was to abolish the tax.
But she refused to say she trusts her Chancellor when challenged by broadcasters, instead saying the two work “very closely”.
Defending the U-turn, Ms Truss said: “What we’ve done is we’ve listened to what people said on this issue.”
Mr Kwarteng had been planning to wait until November 23 to publish his medium-term fiscal plan and official forecasts from the Office for Budget Responsibility (OBR).
But it is understood he will publish them later this month after he told the Tory party conference in Birmingham he will set out more “shortly”.
The Prime Minister did not rule out raising the state pension age beyond 67, telling reporters: “You’re asking me to speculate about all kinds of decisions that haven’t yet been made.”
Asked whether the Government will help with mortgage payments driven up by rising interest rates, she said: “These are difficult times but we will do as a Government what we can to help people get through at the same time as making sure we’re building the positive economy of the future.”
The Daily Mail reported that the Prime Minister plans to raise benefits in line with earnings rather than inflation and tell recipients it is unfair to receive a higher raise than workers.
Around two-fifths of Universal Credit claimants – some two million people – are in work and inflation has soared to around 10% while wage growth has fallen far behind on closer to 5%.
Ms Mordaunt, who ran against Ms Truss in the Tory leadership contest, 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 and so have a lot of my colleagues,” she 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.”
Former Cabinet ministers Michael Gove and Damian Green have already spoken out with concerns about any failure to raise benefits in line with inflation.
Mel Stride, Tory chairman of the Treasury Select Committee, said he would have to “think long and hard” if asked to vote to increase benefits in line with earnings rather than inflation.