Rishi Sunak and Liz Truss vie to replace Boris Johnson. Neither of them has a “real plan” to fix their faltering economy
“None of them have a real plan except to cut taxes,” he told CNN Business.
“It’s all about the level of taxes and the size of the government. These are important questions… [but] There is no easy solution in terms of lowering taxes to the deep problems we face here.”
While some of the difficulties afflicting the world’s fifth-largest economy would be largely outside the control of Sunak or Truss, they made bold promises to the British. Can they hand them over?
global energy prices
Sunak, the government’s former chancellor, has said tackling inflation is his top priority – annual consumer price inflation in the UK hit a 40-year high last month at 9.4%. This is the fastest increase among the G7 countries.
But Sunak’s options are limited, if not non-existent, given the exposure of the UK, as a major importer of the fuel, to global energy prices.
“We’re importing that inflation,” Sanjay Raja, chief UK economist at Deutsche Bank, told CNN Business.
“The United Kingdom, as a small and open economy, cannot do much, [it] These goods cannot be supplied and configured to limit the increase in prices to offset inflation.”
The country spends more on importing goods than it earns on its exports. Rising fuel costs have helped the UK widen the trade deficit by 8.3%, the largest since the Government Statistics Office began keeping records in 1955.
Add to that a weaker currency – the pound has lost nearly 12% of its value against the US dollar since the start of this year – and the country can expect its import costs to increase, while its exports could become more competitive on a global store.
“There’s more money spent than income,” Maria Demirtzis, interim director at Bruegel, an economic think tank, told CNN Business.
Demertzis said the UK has effectively dumped its savings to help it absorb the shocks of the past few months. This is only a problem if it lasts longer.
To levy or not to levy a tax
Truss hopes to provide a lifeline for workers and businesses, promising to cut income taxes and scrap a planned corporate tax increase next year. But increased spending could exacerbate inflation and undermine the Bank of England’s efforts to slow the economy to tame wild price increases.
Sunak also promised to cut taxes but once inflation was brought under control.
The Institute for Fiscal Studies (IFS) has estimated that the total tax cuts made by Truss will amount to 30 billion pounds ($36 billion). It has not made any plans to rein in public spending to offset the decline in tax revenue.
It’s an appealing message to the millions struggling to make ends meet, but its critics say the steps will fuel inflation and increase public debt, which is on track to reach £100 billion this year.
In June, inflation pushed public debt interest payments to the highest level since the government began keeping records 25 years ago.
“surely [cutting income tax] It will boost incentives to enter work and earn more, although these effects will not be nearly enough to make the reform pay off,” the IFC said in a note Thursday.
The IFS said that if Truss wins and fails to cut spending, reality will eventually bite. “But in the end, lower taxes mean lower [public] spending.”
Despite a slight rise in UK GDP in May, the last month for which data was released, fears of the country sliding into recession have not gone away yet.
However, one of the biggest drivers of growth – productivity – has stagnated since the 2008 financial crisis.
“The core of economic growth is productivity growth,” Dean Turner, European and British economist at UBS, told CNN Business. Productivity measures output per unit of capital, labor, or other inputs.
According to the Office for National Statistics, in the decade to 2007 UK output per hour worked grew at an average of 1.9% per year, but fell to 0.7% in the decade following the financial crisis. This is the second slowest growth in the G7 after Italy.
Turner said the UK would need to “rethink [its] A complete economic model ‘to enhance productivity.
“The fact of the matter is that we’re not doing enough investment, we’re not doing enough research and development in the UK, and that’s holding back our productivity growth,” said Turner.
Higher productivity will be a boon to workers. Companies can produce more for the same number of employees, and pay them higher salaries.
Despite rising inflation, median wages are no higher today than they were before 2008, Resolution said in a report this month.
Ilzetzki said that more investment in innovation, research and development, and providing job training for the workforce would go a long way in boosting productivity, as well as encouraging migration.
However, none of Truss and Snack’s proposals “would put even a slight impact on the deep structural challenges the UK faces,” he said.
Britain’s exit from the European Union remains unresolved
According to Elzetsky, the next prime minister’s main priority should be to clarify “finally, the UK’s relationship with its largest trading partner, the European Union”.
Since then, Truss, who voted to remain in the European Union in 2016, has become a staunch advocate of Brexit. It is pushing to tear up the Northern Ireland Protocol – part of the central legislation of the EU Withdrawal Agreement the UK signed in 2020 – which allows the free flow of goods between Northern Ireland and the Republic of Ireland.
The protocol keeps Northern Ireland subject to EU rules on internal trade, and means that goods moving between the country and the rest of the UK must be checked.
Critics argue that the arrangement effectively creates a maritime border within the UK, and involves onerous costs and paperwork for companies.
While serving as the UK’s foreign secretary earlier this year, Truss introduced legislation that promised to “end the intolerable situation where people in Northern Ireland are treated differently from the rest of the UK”, and protect the country’s “territorial integrity”.
But bypassing the protocol could lead to retaliation from the EU, with tariffs imposed on UK exports. The resulting trade war will be very bad for UK business.
Sunak has been less vocal about how he would approach the issue, but has previously said he would prefer a negotiated settlement with Europe.
Ilzetzki said the uncertainty is discouraging investment in the UK.
“No one is going to invest in the UK for a few tax points less when they are not sure whether British exporters will be in a trade war with the EU within a year,” he added.
To make matters worse, a million workers are out of the workforce, and many are unlikely to return. Nearly half of them cited chronic ill health as a reason for leaving work, according to the Institute for Learning and Work.
“We have seen a mass exodus of workers unlike anywhere else we have seen in the developed world,” Raja said.