Truss v Sunak – the economic outlook

by | Aug 24, 2022


Written by Chris Beauchamp, Chief Market Analyst at IG Group

Whoever becomes Britain’s Prime Minister in the autumn faces another major policy challenge. Both Liz Truss and Rishi Sunak have pledged some measure of help, but much of these promises need to be taken with a pinch of salt, as leadership pitches designed to appeal to a very narrow electorate.

Ironically, of course, the person who knows most about the current state of the nation’s finances is unlikely to end up in No. 10 come September. Rishi Sunak trails far behind in polling of Tory members, and it would take a monumental error of polling for him to actually emerge the winner.

Sunak has said he will cut VAT on energy bills and increase the household support announced in May, while also promising a cut in the basic rate to 16% by 2029. Given the immediacy of the crisis, this last can be safely disregarded as of no real value. So far Sunak has not issued a view on the BoE’s independence.

Meanwhile, Liz Truss wants to scrap the green levies on bills and expand energy supply (how this can be done in time to have a real impact for the winter is debateable), but views ‘handouts’ as a last resort, though this is mostly to appease the Tory voters who are still wedded to the Thatcherite approach.

Ultimately, whichever candidate wins will face tough choices, with a furlough-like scheme to shield households and businesses from the worst of energy price rises required. And with rates rising, this means borrowing will not get any cheaper, reducing the scope for tax cuts.

A big enough assistance scheme might be sufficient to ward off the worst of a recession, which might provide enough good news to stabilise sterling against the dollar. But if the Fed is still pressing on with tighter policy, and at a steeper rate than the BoE, then this might matter little.

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