Rishi Sunak and Liz Truss are vying for Boris Johnson’s seat. No one has a “real plan” to fix a sick economy.

But Ethan Ilzetzky, an associate professor of economics at the London School of Economics, says the leadership debate is still “decoupled” from the nature and scope of the problem. economic problemsA: A decade-long stagnation in productivity levels will not be easily resolved.

“None of them have a real plan other than a tax cut,” he told CNN Business.

“It’s all about the level of taxes, the size of the government. These are important questions… [but] there is no simple solution in terms of tax cuts for the serious problems we have,” he said.

While some of the hardships facing the world’s fifth-largest economy are largely beyond the control of either Sunak or Truss, they made bold promises to the British. Can they deliver them?

World energy prices

Sunak, the government’s former finance minister, said fighting inflation was his biggest priority: UK annual consumer price inflation hit another 40-year high last month, hitting 9.4%. This is the fastest growth among the G7 countries.

But Sunak’s options are limited, if not non-existent, given how exposed the UK, as a major fuel importer, is to global energy prices.

“We are importing this inflation,” Sanjay Raja, chief economist at Deutsche Bank in the UK, told CNN Business.

The Bank of England has higher interest rates five times since December in an attempt to tame rising prices. Inflation is expected to exceed 11% at the end of this year. But his options are limited, Raja says.

“The UK, as a small country with an open economy, can do little [it] cannot supply and produce these goods in order to limit the rise in prices and offset this inflation,” Raja said.

The country spends more on imports than it earns on exports. Soaring fuel prices helped the UK widen its trade deficit by 8.3%, the biggest since the government statistics office started keeping records in 1955.

Add to that a weakening currency – the pound has lost almost 12% of its value against the US dollar since the beginning of this year – and the country can expect the value of its imports to increase while its exports can become more competitive in the global market.

“A lot more money is leaving than coming in,” Maria Demertzis, acting director of economic think tank Bruegel, told CNN Business.

The UK has used its savings effectively to help it cope with the turmoil of the past few months, Demertzis said. This is only a problem if it goes on much longer.

But world energy prices show no signs of cooling in the near future. Impressive wholesale natural gas prices have increased annual electricity bills for millions of UK households by 54% this year. Bills are expected to rise again to £3,000 ($3,572) in the fall, according to research firm Cornwall Insight.
A shopper walks down Shambles Street in York, UK on Monday 20 June 2022.  Last month, inflation hit a 40-year high at 9.4%.  Photographer: Ian Forsyth/Bloomberg via Getty Images
The British responded by tightening their belts, spending less in supermarkets and getting rid of their streaming subscriptions.
Indeed, real wages — inflation-adjusted wages for workers — have suffered biggest drop in over two decades between March and May, official data showed this week.

To tax or not to tax

Truss hopes to offer workers and businesses a lifeline by promising to cut income taxes and drop a planned tax hike for businesses next year. But increased spending could exacerbate inflation and undermine the Bank of England’s efforts to slow the economy to tame runaway prices.

Sunak also promised to cut taxes, but only after inflation was brought under control.

The Institute for Financial Studies (IFS) has calculated that Truss’s total tax cuts will be £30 billion ($36 billion). She laid out no plans to cut government spending to make up for falling tax revenues.

It’s an appealing message for millions of people struggling to make ends meet, but her critics say the moves will further boost inflation and raise public debt, which should hit £100bn this year.

In June, inflation pushed interest payments on government debt to the highest level since the government began keeping records 25 years ago.

“Undoubtedly [cutting income tax] will strengthen incentives to work and earn more, although this effect will not be enough to make the reform pay off,” the IFS said in a statement published on Thursday.

If Truss wins and fails to cut costs, IFS said, reality will eventually bite. “But in the end, lower taxes mean lower [public] expenses,” he added.

Performance decline

Despite a slight increase in UK GDP in May, the last month for which data are available, fears that the country will slide into recession have not gone away.

However, since the 2008 financial crisis, one of the biggest drivers of growth – productivity – has stalled.

“The backbone of economic growth is productivity growth,” Dean Turner, European and UK economist at UBS Bank, told CNN Business. Productivity measures the amount of output per unit of capital, labor, or other inputs.

In the decade to 2007, labor productivity per hour in the UK grew at an average rate of 1.9% annually, according to the Office for National Statistics, but dropped 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 needed to “rethink [its] holistic economic model” to improve productivity.

“The thing is, we’re just not investing enough, we’re not doing enough research and development in the UK, and that’s what’s hindering our productivity growth,” Turner said.

Higher productivity would be a boon for the workers. Companies could produce more with the same number of employees and afford to pay them higher wages.

Despite high inflation, average wages today are no higher than they were before 2008, the Resolution Foundation said in a report this month.

Ilzetzky said that increasing investment in innovation, research and development, and providing training for the workforce would boost productivity as well as encourage immigration.

However, none of Truss’s and Sunak’s proposals “would do even minor damage to the deep structural problems facing the UK,” he said.

Brexit is still undecided

According to Ilzetzky, the top priority for the next prime minister should be “to once and for all clear up the UK’s relationship with its larger trading partner” – the European Union.

Truss, who voted to stay in the EU in 2016, has since become a staunch supporter of Brexit. She is pushing to break the Northern Ireland Protocol – the piece of legislation central to the EU withdrawal agreement the UK signed in 2020 – which ensures the free flow of goods between Northern Ireland and the Republic of Ireland.

Under the protocol, Northern Ireland is subject to EU internal trade rules and means that goods moving between the country and the rest of the UK must be inspected.

Critics argue that such an arrangement effectively creates a maritime border within the UK and entails burdensome costs and paperwork for businesses.

Truss, as UK Foreign Secretary earlier this year, introduced legislation promising to “end the unacceptable situation of people in Northern Ireland being treated differently from the rest of the UK” and to protect the “territorial integrity of the country”.

But the cancellation of the protocol could lead to retaliatory measures from the EU in the form of tariffs on exports from the UK. The resulting trade war will be very bad for British business.

Sunak has been less forthcoming about how he will handle the issue, but has previously said he would prefer a negotiated settlement with Europe.

According to Ilzetzky, uncertainty discourages investment in the UK.

“No one is going to invest in the UK for a few lower tax rates if they are not sure if British exporters will be in a trade war with the EU within a year,” he added.

The dual impact of Brexit and the pandemic has also made it much more difficult for UK employers to bring in massive numbers of workers to help fill them. labor shortage.
From January 2021, all EU citizens looking for work must pass the same point immigration process, like other nationalities. According to official statistics, there were around 211,000 fewer EU citizens working in the UK in the first quarter than in the same period in 2020, while the number of non-EU workers rose by 182,000.

To make matters worse, one million workers have left the labor market, and many of them are unlikely to return. According to the Institute for Training and Work, about half cited a chronic illness as the reason for leaving work.

“We are seeing an exodus of workers that we have not seen anywhere else in the developed world,” Raja said.