The contest between Liz Truss and Rishi Sunak gives party members a real choice of vision and policy for the future of our country and our party. Rishi is the continuity candidate who wants to keep economic policy unchanged, whilst being the main architect of a change of Prime Minister. Liz Truss, who was loyal to Boris, is the candidate for an exciting new direction. Conscious from inside government of how the Treasury had cramped the Prime Minister’s vision, she wants to make changes of approach to ignite a more confident U.K. and a more prosperous people.
Rishi Sunak is the perfectly-dressed, well-presented embodiment of Treasury orthodoxy and establishment caution. He wants to curb the inflation first before rolling out a positive growth strategy. He does not accept any responsibility for the high inflation which occurred on his watch despite signing off £450 billion of newly created money.
He claims he respected the independence of the Bank of England though he underwrote every penny of its excessive bond buying and presumably agreed the policy first with them. He does not explain how the Bank missed the obvious rise of a big inflation or how the Treasury – for two years running – grossly exaggerated the likely state borrowing figures to get him to argue for higher taxes.
Rishi’s plan grinds on, with a 31 percent increase in the business tax rate next year to make U.K. business less competitive and to cut the funds they have to invest. He also wants more than 3 years of an excess profits tax on North Sea oil and gas at the very moment we are short of both and need more domestic gas as a crucial transition fuel to power industry and heat homes. He thinks higher taxes bring a lower deficit.
Unfortunately, if they push the U.K. into recession next year it will bring a higher deficit as jobs are lost, turnover falls, and profits decline. The OBR/Treasury model underestimates the extra revenue you get from growth. Last year, with faster growth and no tax rises, they collected £77 billion more than their forecast. When growth slows, they often make the other mistake, underestimating revenue loss.
He also thinks raising taxes cuts inflation. The theory goes that charging higher taxes leaves people and companies with less money to spend so demand drops. This leaves out the obvious point that if you charge more VAT on items like petrol that are going up a lot in price the first direct result of more VAT is higher prices. Inflation comes from the state printing too much money or from the commercial banks offering too much credit. It is best controlled by money and credit policies, not by raising taxes which have an indirect and unreliable impact on it.
In contrast, Liz Truss has a more informed view of the dynamics of a modern economy. She would expect the central bank to do a better job at controlling money and credit to curb inflation as it is now doing. She would want the government to follow a growth policy where cutting some tax rates and removing some taxes would stimulate more jobs, incomes and profits and so increase revenues.
In the battle over who best embodies the Thatcher legacy Truss draws on the highly successful post-1981 policy of cutting the rates of income tax and business tax substantially as part of going for growth. The revenues of both increased as the economy improved, aided by deregulations, privatisations, and a strong competition policy.
Sunak favours the first two years of the Thatcher era when higher taxes helped cause a recession and plunged the government into unpopularity. Good growth after the 1981 Budget rested on a necessary monetary relaxation to get out of the downturn. Sunak should study the Thatcher policy failings and successes more carefully if he wishes to benefit from them.
The U.K. has boundless opportunity to find and produce more energy, to grow more food at home, to restore the fishing industry, to expand global services and rebuild industry with cheaper energy and great research and innovation. The U.K. can lead the world in several important sectors, can up the rate of private sector investment and help more people on their own personal journeys to home and share ownership and better skilled and paid jobs.
To do so it needs to adopt the lower tax model that has so boosted private investment in countries like the Republic of Ireland and Singapore and can do so here. Liz Truss offers the well-based optimism that policy change can bring. She also brings a record of determination and delivery that is much needed to alter course and bring us Brexit wins. She saw through the Northern Ireland green lane proposals and VAT powers to re-unite our country with Sunak opposing bold action.
This is a great time to be a Conservative. We need to reject the pessimism of those who want us to stay aligned with the EU, importing too much, and putting up taxes to sustain a public sector that is too bloated by years of expanding the bureaucracy at the expense of the services. Many Red and Blue Wall voters voted Conservative last time to get a change. They want greater freedom, more free enterprise, wider ownership, and help with their personal aspirations. That is exactly what Truss is offering.