(Bloomberg) -- Britain’s soaring inflation rate, slowing growth and a brutal cost-of-living squeeze will form the backdrop of the contest to replace Boris Johnson as prime minister.
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Liz Truss and Rishi Sunak, the final contenders in the race to lead the ruling Conservative Party and the nation, have sharply divergent views on how to handle the economy and public finances.
Sunak, the former chancellor of the exchequer, is the continuity candidate, standing for prudence with the public finances. He fears that tax cuts will keep inflation high and make the cost of living crisis worse. He voted to leave the European Union.
Truss, the foreign secretary, is the tax-cutting economic radical who wants to supercharge growth, is worried about a recession and would review the Bank of England’s mandate. She voted to remain in the EU.
Inflation, the cost-of-living crisis, tax cuts, economic reform and public sector pay are likely to feature prominently in the debate.
Conservative members have until Sept. 2 to vote for a candidate, with a decision due on Sept. 5. Here’s a breakdown of the economic platforms of the two candidates:
As chancellor until his resignation earlier this month, Sunak’s economic platform is well known.
He raised payroll taxes for employees and employers, and dragged more workers into higher income tax bands by freezing thresholds. For business, he tabled plans to lift corporation tax from 19% to 25% next year.
He is sticking with the plans, which will increase the tax burden to its highest level in 70 years, and has tried to make a virtue of them.
He attacked rivals for telling “comforting fairy tales” about tax cuts, saying borrowing more now would lead to “higher inflation, higher mortgage rates, eroded savings.” And he promised “responsible” tax cuts “that drive growth” once inflation is under control.
Drawing parallels with Margaret Thatcher, he pointed out that she also raised taxes in the face of high inflation and a looming recession in 1981.
Like her, Sunak insists that tackling inflation must be his priority. He has backed the Bank of England, saying he was “worried by some of the things I’m hearing” from other candidates, who have criticized the institution.
Despite his fiscal prudence -- he insisted on a £12 billion increase in payroll taxes to fund health spending -- he claims to be an instinctive Tory tax cutter.
It may prove a hard sell, though. Sunak is more concerned about the impact of rising interest rates and inflation on servicing the national debt than Truss, who voted against his payroll tax and is happy to borrow more.
As chancellor, Sunak provided £37 billion of support for households during the cost of living crisis and has said he would go further if needed.
His longer term plan for growth hinges on “capital, people, ideas.” He wants to cut taxes on business investment and in March 2021, unveiled the biggest investment tax break in history.
It was accompanied by an increase in corporation tax for larger businesses to 25% from 19%, however, as he attempted to sharpen the incentives for businesses to invest.
Financial regulations would be relaxed to provide long-term capital for business, and the Apprenticeship Levy overhauled to increase spending on workforce training.
Citing his days in Silicon Valley, Sunak wants to make the UK economy “the most innovative in the world.” To do so, he will reform research and development reliefs and unleash an investment “Big Bang” by cutting back 2,400 EU laws to take advantage of “Brexit freedoms.”
On pay for public-sector workers, Sunak believes the latest settlements are fair and would not provide further funding, leaving departments to find savings to pay for the higher wages.
In contrast to Sunak, the foreign secretary is an economic radical. She promises aggressive tax cuts to boost growth on day one, vows to “take on Whitehall” and even reform the Bank of England.
“The business-as-usual economic strategy is not bold enough for the crisis we’re in,” Truss said. “We’ve seen slow growth for decades. We need to do different.”
She pledged to “unleash a bold plan to reform our economy” and accused Sunak of “choking off growth” by raising taxes and leading the UK into recession.
Truss has said that on her first day as prime minister she would reverse Sunak’s increase in payroll tax, scrap plans to raise corporation tax and temporarily abolish green levies on energy bills.
The policies, a mixture of immediate help for struggling households and a long-term agenda for growth, would cost more than £30 billion and, according to Truss, “can be paid for within the existing fiscal envelope.”
In other words, the money would be borrowed. Truss has argued that she would fund it by changing the treatment of £311 billion of debt taken on during the pandemic. Details of the mechanism have yet to be provided.
Her spokesman said it would be “treated as an exceptional item to be paid off in the long term” and compared it to World War II debt.
Britain’s war debt was at low interest rates and paid over 50 years, with the first installment made five years after the debt was taken. Annual payments were deferred six times.
Truss’s broader growth vision is traditionally Thatcherite, marked by low taxes and deregulation. She has vowed to “simplify” taxes and ensure people are not penalized for caring for children or relatives.
She has also warned that raising public sector pay could lead to a wage price spiral.
She told The Times newspaper this week that she would not bring back austerity. David Cameron’s government from 2010 to 2015 made “cuts to public spending that weren’t sustainable. I will not allow that to happen,” she said.
Her policies imply big increases in debt, which she hopes would be made affordable by much the faster growth she believes she can unleash.
Institutionally, she has also expressed a degree radicalism. She questioned the BOE’s handling of inflation, vowing to review its mandate. She made a cryptic reference to the Bank of Japan.
According to her spokesman, Truss believes that a mandate review is “overdue,” given the last one was 25 years ago. He said a nominal GDP target could be considered. The Japanese government introduced a nominal GDP target in 2015.
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