How do Liz Truss and Rishi Sunak plan to fix the UK economy if they become prime minister?

Whomever emerges victorious in the Conservative leadership contest will face several huge economic challenges, writes Ben Chapman

Labour leader Sir Keir Starmer has sought to draw the battle lines for the next election, vowing to put the economy at the centre of the debate.

“Growth, growth and growth” will be Labour’s priorities, Starmer said in a speech on Monday.

It should be fertile ground for the opposition, which has 12 years of lacklustre economic performance to point to. However, Starmer will have to fight against a lingering public perception that, despite their recent record, the Conservatives are the more competent party on the economy.

Some of the work has been done for him by the candidates for the Tory leadership – who have spent much of the past few weeks tearing into their own party’s record in a bid to score points against their fellow candidates.

Whether Liz Truss or Rishi Sunak emerge victorious in that contest, the winner will face several huge economic challenges that look set to dominate the political agenda for the foreseeable future.

Energy bills

The cost of energy is going to jump sharply again in October and perhaps further still in January, edging close to £3,000 for a typical household. That risks causing widespread hardship and tipping the country into a full-blown recession.

Sunak has handed out billions in support including £400 grants for millions of households announced earlier this year. Since then, prices have risen further still, meaning more help is likely to be required in the autumn.

Sunak has hinted he may back additional support but this will be at odds with his desire to balance the books. Truss appears much more willing to turn to additional borrowing to fund more help, saying she would push to reclassify £300bn of borrowing during the pandemic as an “exceptional item” to be paid off in the long term.

That would free up space for more spending.

Taxation and growth

The Tory leadership campaign has been notably light on policies, with tax and spending one of the few areas where all of the hopefuls have been keen to nail their colours to the mast.

Sunak says he will be “honest” about the public finances, seeking to draw a line between himself, as a low-tax Conservative, and Boris Johnson, who was more willing to spend and borrow.

His approach will run into two problems The first is that he may not be seen as credible by traditional Tories, given that he was a chancellor who spent more than any other in history. He also chose to raise national insurance and freeze income tax thresholds, taking the tax burden to its highest level for a generation.

The second is that his focus on prioritising balanced government budgets sounds very much like more of the same austerity medicine that has damaged growth during the past decade.

Truss has accused Sunak of “choking off growth” by hiking taxes and leading the UK into a recession. She has sought to emphasise her willingness to cut taxes and claimed she will “unleash a bold plan to reform our economy”.

She has indicated a willingness to borrow more and cut taxes. Most economists agree that Truss’s proposed tax cuts will help to fuel inflation without doing much to tackle the underlying structural reasons that economic growth has been so diabolical since the Tories came to power in 2010.

In short, neither candidate to become Britain’s next prime minister has put forward a credible case for how they will turn around the nation’s economic fortunes, choosing instead to stick to well-worn lines about prudence and tax cuts.

This could be a clear point of difference with Labour heading into a general election. Rather than hoping that the free market will finally deliver growth, Starmer has said he will set up an industrial strategy council to set out "strategic national priorities that go beyond the political cycle".

Wages

Price rises are one side of the cost-of-living squeeze, the other is wages. Most income groups have seen a sharp decline in the value of their pay this year with wage packets failing to keep up with the rising cost of essentials.

The leadership hopefuls have both emphasised the need for restraint on public sector pay deals. Sunak has indicated he believes recent settlements are fair and would not provide further funding, meaning departments will have to find further savings to pay for any higher wages.

Inflation

Sunak hopes to tame inflation by reining in government borrowing and spending. Truss has made some ambiguous statements about reviewing the Bank of England’s mandate, without elaborating on how this would reduce the rate at which prices are rising.

The issue is likely to be far more out of their control than they would like to admit. The current bout of inflation is largely a result of our reliance on imported energy, as well as the global economy’s dependence on fossil fuels.

That reliance could have been greatly reduced if successive governments had continued investing in decarbonising the UK instead of cutting subsidies, making it more difficult to build onshore windfarms and slashing funding to make homes more energy-efficient.

Although they have both backed the government’s net zero ambitions, neither Truss nor Sunak has said exactly what they would do tackle the climate crisis, probably because the issue is so near the bottom of priorities for Conservative Party members.

Truss has even said she would temporarily abolish green levies on energy bills as part of a plan to ease living costs.