The Bank of England’s prediction that the UK is headed for recession refocused the next government’s fiscal policy at Thursday’s Conservative leadership debate.
Liz Truss said tax cuts and investment attraction could avoid a recession, while Rishi Sunak said the opposition’s plan would “ignite” runaway inflation.
Britain’s central bank, the Bank of England, raised its key interest rate to 1.75% on Thursday to combat inflation expected to exceed 13% at the end of the year. This is his biggest raise in 27 years.
It also predicts the longest recession since 2008, with the UK economy expected to contract for more than a year. A recession is usually defined as two or more consecutive quarters of negative growth in gross domestic product (GDP).
Asked how the impact of the “inevitable” recession would be mitigated, Mr Truss said the Bank of England’s forecast was “very worrying” and not “inevitable”.
Having previously said the current inflation is driven by the COVID-19 pandemic and a “massive supply-side shock” after Russia’s invasion of Ukraine, Truss told audiences on Thursday that businesses will keep to avoid recession and prevent unemployment by lowering taxes to attract investment, reduce bureaucracy and kick-start “infrastructure.” [and] structural project.
“We will do everything we can to grow the economy by keeping taxes low, taking advantage of post-Brexit freedoms, unleashing investment, changing procurement rules and more, doing things differently. But now is the time to be bold, because if we don’t act now, we are headed for very difficult times.”
Truss has criticized Sunak, who served as prime minister from February 2020 to July 2022, for raising national insurance rates earlier this year and later planning to raise corporate taxes. Proponents say the policy will make the UK less competitive, stifle growth and risk stagflation.
She also pledged to help households facing high energy bills by immediately reversing national insurance increases and suspending green energy levies.
But Sunak argued that Truss’ plan to cut taxes immediately would “ignite this inflationary spiral” and “make the situation worse.”
The official prime minister has argued that the “root cause” of the expected recession is inflation and said it should be a “top priority” for the government to address.
Snack defended his policy on national insurance, saying it helped with the living expenses of “those who need our help most” during the fall and winter.
After raising the national insurance premium rate by 1.25% in April, the government also raised the national insurance threshold in July.
“That’s what the Conservative government should do, to support those who need our help most when they need it,” he said.
Snack argued that growing the economy and creating jobs is a way to “control inflation over time,” but that “it all starts with not making things worse.”
Snack has previously defended plans to raise the corporate tax, saying the rate will remain competitive and will not affect “genuinely small businesses”, which he said are “70% of registered UK companies”. said.
Sunak also said it would cut taxes on business investment, arguing that low corporate taxes have “completely won investment in our economy.”
About 160,000 Conservatives are expected to vote by next week, with the results of the election expected to be announced on 5 September.
So far, Truss has consistently led in polls among Conservative voters and has more support from former candidates and ministers.
However, Sunak appeared to win the majority of the audience after Thursday’s debate hosted by Sky News.