Political debates already center on tax cuts and assistance for families struggling with a rise in living expenses, and in the coming weeks, pressure on the Treasury to be generous will only grow.
By September, when the current Conservative Party hopes to elect a new leader, public sector employees are likely to threaten to strike over wage demands.
The Bank of England is expected to have raised interest rates by as much as a half percentage point to combat the rocketing inflation, which is at a 40-year high, and increases in energy prices and rail fares will have been announced.
Rising inflation and the slowing economy are the “immediate challenges,” according to Gerard Lyons, chief economist at Netwealth and a former adviser to Johnson. “That necessitates a looser fiscal policy and a tighter monetary policy.”
Foreign Secretary Liz Truss, former Health Secretary Sajid Javid, and Defence Secretary Ben Wallace are among the candidates for the top position. With a mix of tax cuts and spending increases, each is likely to win over grassroots Conservative members.
Additionally, they’ll want to uphold Johnson’s landslide victory-producing manifesto pledges to “level up” less prosperous regions of the country outside of London from the 2019 election.
All of this means that talk of austerity is unlikely to play a significant role in any candidate’s platform more than ten years after the Conservatives took office on a platform of limiting government borrowing.
The argument, according to Lyons, “would be tax cuts on fuel and energy, a suspension of the corporation tax increase next year, and help for households through an income tax cut,” if we didn’t have this temporary situation.
The central bank’s goal to tighten monetary policy in order to control inflation contrasts with the political instinct to splash out Treasury funds. Investors anticipate the BOE to quickly increase interest rates, delivering additional half-point increases by year’s end in addition to the one in August.
Conservatives have been cautioned against making a significant expenditure by both business leaders and the Treasury’s Office for Budget Responsibility. The budget is “unsustainable,” according to the OBR, and will require years of tax increases and spending reductions.
A state that spends and taxes much more than Tory traditions would suggest could be Johnson’s lasting legacy. Candidates are already lining up to pledge to reduce the tax burden in the UK, which former Chancellor Rishi Sunak raised to its highest level since the 1940s.
In The Daily Telegraph on Friday, Tom Tugendhat, who is gaining support from MPs, stated that “taxes are too high.” He promised to cut fuel taxes and roll back the most recent increase in payroll taxes as part of plans to build a “low-tax, high-growth economy.”
The new chancellor and potential candidate Nadhim Zahawi has stated that “nothing is off the table” and that he will “look at every possible way we can support hardworking families.”
In an effort to boost the economy’s sluggish growth, he has hinted that he will increase the temporary 5p fuel duty cut and scrap the increase in corporation tax from 19 to 25 percent that is scheduled to take effect in the coming year.
Truss and other front-runners have previously stated their support for tax cuts. Even Sunak has attempted to portray himself as a tax-cutting Tory, despite the fact that his track record in office may prove to be a serious hindrance.
Sunak “was not a successful chancellor — he was a high tax chancellor,” said Jacob Rees-Mogg, the minister for Brexit opportunities, on Thursday.
A temporary reduction in sales tax is a different choice being considered. This one is justified on the grounds that it would lower inflation automatically while also lowering costs for households. The proposal was being examined by Johnson’s office prior to his resignation.
According to David Owen of Saltmarsh Economics, “a large portion of the calculation will revolve around trying to select a candidate that appeals to a wide cross-selection of the electorate; including former red wall seats, as well as the South of England and the larger cities.”
This all shifts the argument further in favor of a looser fiscal stance and higher rates as far as the likely policy mix is concerned.
The support provided during the coronavirus pandemic, which increased public debt to a record high for a peacetime period, will be added to by easier fiscal policy. This year, Sunak has already given assistance to households worth £37 billion, including a £15 billion package in late May that was only partially offset by a windfall tax on energy producers.
However, there will probably be numerous requests for additional giveaways during the weeks that the leadership competition will last. Public sector employees are clamoring for a pay settlement that was due in April and, if one is not reached, are threatening a summer of strikes. The government’s predicted increases of 3% won’t even come close.
Nurses are requesting pay increases that are 5% higher than inflation. The offers of 9% for new hires and 5% for current employees are unsatisfactory to teachers. A 15 percent pay settlement has been rejected by barristers. They have already been on strike and are threatening additional action, just like rail workers.
Johnson claimed that his caretaker administration would not make any significant financial decisions, but it’s possible that they will be unavoidable. Along with a rise in the Bank of England interest rate, a 40 percent increase in energy costs and possible double-digit increases in rail fares will be announced in August.
According to Citigroup economist Benjamin Nabarro, candidates will inevitably be forced to address the issues. The setting “suggests a contest dominated by the cost of living,” he claimed.
According to Lyons, there must be a paradigm shift in UK economic thinking that puts the Treasury’s conventional wisdom—that the UK has a structurally low growth economy—back in its place. A growth agenda and fiscal conservatism are not mutually exclusive. Increased growth lowers the debt to GDP ratio.
