There really is a lot going on. Holiday chaos at Dover and international airports, cost of living crises, war in Ukraine, NHS under pressure, inequalities in the economy. And with all that, we won’t have a prime minister until the 5th September.
Now we are down to the last two candidates, a campaign amongst the selectorate of Conservative Party members to elect the new leader is under way. That new leader will ask the Queen to form a government. Then we have a new Prime Minister.
The two candidates are setting out how they will tackle these crises. And it gets technical.
Rishi Sunak, who has current experience of running the economy in difficult times, believes we need to maintain our approach of fiscal prudence in order to tackle inflation. Once inflation is under control, we can look at our international competitiveness and cut taxes in more stable times.
Lis Truss favours boosting the economy by cutting taxes now to generate inward investment and to grow our way out of the problems.
Both ideas have merits. I fully support lower taxes that generate more productivity and growth, stimulating bigger tax receipts to pay for our valued public services. But the question is: is now the right time to stimulate growth?
With inflation running near 10%, the Bank of England (who is mandated to maintain inflation at 2%) can use just one tool to tackle rising prices – interest rates. Hike interest rates and it tightens the supply of money, killing off inflation. But if the government loosens money supply by cutting taxes in a high inflation environment, the Bank of England must respond with higher interest rates.
One economist has suggested Liz Truss’s plans could lead to interest rates of 7%. With the base rate at 1.25%, this suggests homeowners could see a hike in their mortgage rate of 5.75%. If you have a £100,000 mortgage, you could see the annual cost go up by £5,750 (notwithstanding fixed rate deals). No one will have budgeted for this, this current low interest rate environment being around for over a decade.
Both candidates are outstanding. Both have proven track records in their departments. Sunak got the economy through Covid lockdowns: Truss is doing well with international relations. So, this is about which policy works better. To my mind, fiscal prudence and sound money make sense right now. Sunak’s ideas are right for the time.