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Liz Truss, the front-runner to become the next UK prime minister, said her plan to cut taxes could help stave off a recession after the Bank of England depicted a dire picture for the economy.
The central bank forecast on Thursday a deepening economic meltdown with the UK facing a contraction lasting more than a year because of rampant inflation. The stark assessment came just before Truss and opponent Rishi Sunak were questioned in a televised Sky News debate on what they’ll do to help. Truss hit back at the BOE’s “extremely worrying” outlook, but countered that a recession is not inevitable under her tax plan.
“We can change the outcome and we can make it more likely that the economy grows,” said Truss, who holds a 34-point lead among Conservative Party members who cast their leadership ballots over the next four weeks.
Whether it’s Truss or former Chancellor of the Exchequer Sunak entering No. 10 Downing Street on Sept. 6, the parlous state of the economy is a brutal inheritance likely to have political consequences. Boris Johnson’s successor will be under huge pressure to fix the malaise or risk severe retribution from voters with the opposition Labour Party leading in opinion polls.
Truss has vowed to move on from the Johnson era after a series of scandals undermined his leadership. Yet on the economy, there are some echoes of the relentless positivity that also came to define Johnson after he led Britain out of the European Union.
The crux of Truss’s argument is that lower taxes would promote growth. It’s been her narrative throughout the leadership campaign in contrast to warnings from economists that doing so risks exacerbating inflation that the BOE now predicts will hit 13% in October.
Liz Truss Is On Course for a Collision With UK Economic Reality
Her approach is popular among the Tory grassroots members who will decide who becomes Britain’s next leader, in part because it resembles the type of optimism embodied by her predecessor. Speaking late last year and before Russia’s war in Ukraine, it was Johnson who had spoken out against inflation projections, saying fears were unfounded.
Yet Truss’s plan to borrow more to fund government spending also became more costly after the BOE raised interest rates by a half-point on Thursday -- the biggest increase in 27 years -- to 1.75% and signaled its readiness to go further if needed. The central bank is also unwinding its quantitative easing program, another upward pressure on borrowing costs.
Sunak, whose resignation last month helped trigger Johnson’s demise, said he’s worried Truss’s approach would make things worse, because it’s inflation, not the tax burden, that’s causing the recession.
UK inflation hit a new 40-year high in June of 9.4% from a year earlier, up from 9.1% in May. The BOE on Thursday boosted its forecast for the peak of inflation in October, when household energy prices will rise again.
“If we just put fuel on the fire of this inflation spiral, all of us, all of you, are just going to end up with higher mortgage rates, savings and pensions that are eaten away, and misery for millions,” Sunak said, pledging to prioritize gripping inflation before lowering taxes.
But the BOE’s gloomy analysis contained bad news for him too. It suggested the government’s intervention so far -- a multibillion pound package drawn up by Sunak in May -- would have a limited impact, adding only 0.5 points to gross domestic product at its peak, an effect that quickly fades.
Truss vs. Sunak: Where UK Leadership Contenders Stand on Economy
Whoever wins, their immediate task will be finding a way to help Britons through a cost-of-living crisis that will see real disposable incomes fall more than at any time in around 60 years.
With the Tories already trailing Keir Starmer’s Labour Party in most surveys, the BOE’s warnings also have implications for election timing. The next national ballot is due by January 2025 at the latest, though leaders installed by an internal party process -- which will be the case this time -- face a dilemma over whether to seek their own mandate from the public.
Calling a snap vote in the fall might beat the worst of the looming slump, but would also risk the new premier being ejected from office as one of Britain’s shortest-serving leaders. An election later could likely mean going to voters during a period of elevated unemployment and peak economic pain -- or with a recovery barely under way.
The recession will begin in the fourth quarter and the economy will see no quarters of growth until well into 2024, the BOE said. The total slump will be about 2.1%, similar to the 1990s recession, followed by a glacial recovery.
Whether Sunak can overhaul Truss’s lead is likely to depend in large part on which candidate Tory party members trust to turn the economy around. The Conservative party needs “to get real and fast because the lights on the economy are flashing red and the root cause is inflation,” Sunak said.
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