Britain’s rising inflation rate, sluggish growth and brutal cost-of-living pressures will set the backdrop for the race to replace Boris Johnson as prime minister.
Liz Truss and Rishi Sunak, the ruling Conservative Party and arch-rivals in the race to lead the nation, have sharply different views on how to manage the economy and public finances.
Sunak, the former Chancellor of the Exchequer, is the Continuity candidate, standing for prudence with public finances. He fears that tax cuts will keep inflation high and make the cost of living worse. He voted to leave the European Union.
Truss, the foreign secretary, is a tax-cutting economic radical who wants to supercharge growth, worries about recession and will review the Bank of England’s mandate. He voted to stay in the EU.
Inflation, the cost-of-living crisis, tax cuts, economic reforms and public sector pay are likely to feature prominently in the debate.
Conservative members have until September 2 to vote for a candidate, with a decision on September 5. Here’s a breakdown of the two candidates’ economic platforms
Sunak’s economic platform was well-known as chancellor until he resigned earlier this month.
He raised payroll taxes for employees and employers and froze the threshold, pulling more workers into higher income tax bands. For business, he presented plans to raise corporation tax from 19% to 25% next year.
He has stuck with the plan, which would raise the tax burden to the highest level in 70 years, and has tried to make a virtue of it.
He attacked rivals for telling “comfortable fairy tales” about tax cuts, saying more borrowing now could lead to “higher inflation, higher mortgage rates, eroded savings”. And he promised “responsible” tax cuts that would “drive growth” once inflation was under control.
Drawing parallels with Margaret Thatcher, he noted that she raised taxes in 1981 even in the face of high inflation and a growing recession.
Like him, Sunak insists that tackling inflation must be his priority. He backed the Bank of England, saying he was “concerned about what I’m hearing” from other candidates who have criticized the institution.
Despite his fiscal prudence — he pushed for a £12 billion payroll tax hike to pay for health spending — he claims to be a natural Tory tax cut.
This may prove a hard sell though. Sunac is more concerned about the impact of rising interest rates and inflation than Truss, who voted against his payroll tax and is happy to borrow more.
As chancellor, Sunak has provided £37 billion in support for families during the livelihood crisis and said he would go further if needed.
His long-term plan for growth relies on “capital, people, ideas.” He wants to cut taxes on business investments and unveiled the largest investment tax break in history in March 2021.
Corporation tax for larger businesses was accompanied by an increase from 19% to 25%, although he sought to sharpen incentives for business investment.
Financial regulations will be relaxed to provide long-term capital for businesses, and the apprenticeship levy has been revised to increase spending on worker training.
Citing his days in Silicon Valley, Sunak wants to make the UK economy “the most innovative in the world”. To do this, he will reform research and development relief and bring about an investment “big bang” by slashing 2,400 EU laws to take advantage of “Brexit freedoms”.
Regarding public-sector workers’ salaries, Sunak believes the latest settlements are fair and will not provide more funding, leaving departments to seek savings to pay for higher wages.
Unlike Sunak, the foreign secretary is an economic fundamentalist. He promised on day one aggressive tax cuts to boost growth, “taking over Whitehall” and even reforming the Bank of England.
“The business-as-usual economic strategy is not bold enough for the crisis we’re in,” Truss said. “We have seen slow growth for decades. We have to separate.”
He promised to “unveil a bold plan to reform our economy” and accused Sunak of “stifling growth” by raising taxes and driving the UK into recession.
Truss said on his first day as prime minister he would scrap the Sunak payroll tax hike, cancel plans to raise corporation tax and temporarily scrap the green levy on the energy bill.
The policies, a mix of immediate help for struggling families and a longer-term agenda for growth, will cost more than £30 billion and, according to the Trust, “could be paid for within the existing financial envelope.”
In other words, money will be borrowed. Truss has argued that he will finance it by changing the treatment of £311bn of debt during the pandemic. The mechanism has not yet been elucidated.
His spokesman said it would be “considered an exceptional item to be repaid over a long period” and compared it to World War II debt.
Britain’s war loans were repaid at low interest rates and over 50 years, with the first installment paid five years after the loan was taken out. Annual payments are delayed six times.
The Truss’ vision of greater growth is traditionally Thatcherite, characterized by low taxes and deregulation. He promised to “simplify” taxes and ensure that people will not be penalized for caring for children or relatives.
He also warned that public sector pay rises could spiral wage prices.
He told The Times newspaper this week that he would not bring back austerity. From 2010 to 2015 David Cameron’s government “cut public spending which was not sustainable. I will not let that happen,” he said.
His policies imply large increases in debt, which he hopes will be offset by rapid growth that he believes he can unleash.
Institutionally, he also expressed a degree of extremism. He questioned the BOE’s handling of inflation, promising to review its mandate. He made an cryptic reference to the Bank of Japan.
According to his spokeswoman, Truss believes a mandate review is “overdue,” with the last one being 25 years ago. A nominal GDP target can be considered, he said. The Japanese government introduced a nominal GDP target in 2015.