‘Complacent’ Rishinomics under the spotlight

The leadership contender outlined his policies in TV debates. Tom Rees looks at them a little more closely

‘I’ve not taken the easy route,” Rishi Sunak admitted during one of his showdowns with Liz Truss. On economics at least, the former chancellor has not. As he fights to stay in the race to become the next prime minister, Sunak is struggling to win both the heads and hearts of Tory members and Right-wing economists with sober fiscal policy and a tax raising plan.

In a live debate hosted by the BBC on Monday, he took aim at Truss splashing out on the country’s “credit card”, as well as Joe Biden’s big spending and even a key Thatcher adviser. “Do we put it on the country’s credit card and pass the tab to our children and grandchildren?” Sunak said on borrowing. “I don’t think that’s right. I don’t think it’s responsible and it’s certainly not conservative.”

Sunak has thrown red meat to members on immigration, China, trans issues and Brexit. But he has been less willing to budge on economics despite a 20-point-plus gap in polls with Truss. Rishinomics is coming under fire for being too complacent for the huge task ahead – and having a “dog’s dinner” of a tax plan as recession warnings mount. In the face of criticism, however, Sunak last night launched a fightback with plans to scrap VAT on energy bills in an about-turn he hopes will win over sceptical Tory members.

Taxes and cost of living

He came into the contest having set out detailed plans for tax to help stabilise the public finances while chancellor, and has mostly stuck to them. While Truss is promising tax cuts to ease the pain of soaring living costs, Sunak has refused to back down on his “responsible” approach to debt and pay for giveaways by borrowing on the “credit card”.

Higher taxes will pay for higher spending, such as for the NHS, while also having debt on a declining path. But it means fewer giveaways for households feeling the pinch with Sunak saying he would only cut taxes once inflation is under control.

Under plans while in government, he had promised households an income tax cut before the next election. But that will only be after painful rises this year, set to send the tax burden to the highest level since Clement Attlee’s Labour government in the 1940s. Some £18bn will be raised from April’s National Insurance hike while the freezing of income tax thresholds means more workers are being moved into higher bands.

However, there were signs of Sunak’s resistance creaking last night as he unveiled plans to ditch VAT on energy bills for a year from October to help households through a tough winter, in a £4.3bn tax cut. If he struggles to gain ground on Truss, Sunak could announce more taxslashing policies in a desperate bid to win support. As it stands, Sunak’s new proposal is still dwarfed by the £30bn of tax cuts on offer from Truss.

Tom Clougherty, head of tax at the Centre for Policy Studies, says the NI increase was a “very odd thing to push ahead with” given the cost of living crisis that emerged since the hike was announced.

“The charge that Rishi has raised taxes to the highest level in a long, long time, it’s quite a hard one for him to refute,” he says. “It’s not just happened by accident, those have been conscious choices that he has made.”

Torsten Bell, head of the Resolution Foundation, calls Sunak’s plan to cut income tax and freezing thresholds while doing the opposite on National Insurance “a dog’s dinner”.

He says: “No one would have designed this combination intentionally. It leads to lower earners being disproportionately affected.”

Growth

The IMF provided more ammunition for Truss to attack Sunak’s growth plans yesterday as the UK economy returns to sluggish rates following the pandemic.

Britain is expected to have the worst growth of any major economy in 2023 after more than two years under Sunak’s stewardship.

Truss, and even international observers, have warned the Government is slamming the brakes on fiscal support too soon, with other countries holding off on tax rises until after the cost of living crisis.

The OECD, the Paris-based club of wealthy countries, has urged the UK to “consider slowing fiscal consolidation to support growth”, warning it has taken a “contractionary” position.

Others think a more fundamental rethink at the Treasury is needed as Truss urges her rival to be bolder.

Businesses

One important piece of the growth puzzle is business investment, but Sunak’s plans for a sharp rise in corporation tax next year could choke off spending at a crucial moment.

Clougherty says: “A big corporation tax increase – we’re talking about raising the rate by third – as the economy is probably tipping into recession is a very courageous idea in ‘Yes, Minister’ terms. It doesn’t make any sense to me.”

The headline rate is set to rise from 19pc to 25pc under Sunak’s plans, but he also wants to reform capital allowances, rewarding businesses for investments through a tax break.

Experts believe that could offset the damage done by the corporation tax increase if they are ambitious enough.

“Sunak is taking a different line on corporation tax from pretty much any other chancellor since at least the 1970s,” says Stuart Adam, economist at the Institute for Fiscal Studies (IFS).

“The trend we’ve seen across much of the world has been for the headline rate to go down and for capital allowances to become less generous.

“Broader base and lower rate and Sunak is going in the opposite direction.”

Interest rates

Inflation and high interest rates will be the result of Truss’s plan for £30bn of tax cuts funded by borrowing, according to Sunak.

He spent the early part of Monday’s debate repeatedly claiming that Patrick Minford, a former adviser to Margaret Thatcher and a Truss backer, said her tax cuts would cause interest rates to hit 7pc. Minford had never explicitly linked the two and later walked back comments suggesting rates would be at more normal levels if they hit between 5pc and 7pc.

Sunak also argued that excessive fiscal stimulus by the Biden administration caused US mortgage rates to be 50pc higher than Britain’s.

Mainstream economists do agree with Sunak that tax cuts are likely to be inflationary and will push up interest rates but perhaps not to the extent that he is warning. Some economists will also question his commitment to tackle price rises after announcing tax cuts for households himself last night.

Adam, at the IFS, says: “It will tend to add to inflationary pressures, and therefore I would expect the Bank of England to increase interest rates more and more quickly than they otherwise would have done.”