Rishi Sunak or Liz Truss? Tories shouldn't write off 'Trussonomics' yet

The contest for the Tory leadership may have weeks to run, but elite opinion has already plumped firmly for Rishi Sunak, former chancellor of the exchequer and Goldman Sachs banker, as its choice.
 

The Times of London endorsed Sunak on Thursday. The Financial Times and The Economist can be expected to follow. This is a mixed blessing for a candidate who is taken to represent orthodox Treasury opinion. 

By some strange alchemy, Sunak, whose support for Brexit began when he wrote a school essay at 16 denouncing the European Union, has also become the darling of the 2016 Remainers. Meanwhile, his rival, Foreign Secretary Liz Truss, who voted Remain in the 2016 referendum and as a teenager called for the abolition of the monarchy at a Liberal Democrat party conference, may get the backing of the royalist, euroskeptic tabloid The Daily Mail.

Such is the switchback nature of British politics these days.

But these opinion-formers will not decide this election. Instead, that’s the prerogative of some 160,000 Conservative Party members. According to a recent YouGov poll, 62% of them want Truss for leader, giving her a colossal 24-point advantage over Sunak.

The former chancellor must now look to Monday’s television debate on the BBC to whittle down his rival’s lead by showing he has the experience and confidence needed to turn the country’s economic fortunes round. Bring it on. It is about time we had an unsparing debate about the performance of UK plc. The orthodox fiscal conservative Sunak and the more libertarian Truss represent two philosophies that deserve a hearing. 

It is not hard to see why Sunak is regarded by mainstream economists as a bulwark against the populist tide. Earlier this year, the former chancellor turned off the spending spigots, having splurged billions on palliating the damage caused by the pandemic. Now he targets inflation as public enemy number one.

Also in his sights is “Trussonomics,” the foreign secretary’s support for “unfunded” tax cuts, with all the risks that can follow the line. This “sound money” case against Truss argues that tax cuts will widen an already yawning deficit and lead to inflationary repayments of index-linked gilts. After all, “Trussonomics” would be conducted without the safety net of the dynamic US economy and the benefit of the dollar reserve currency.

Tories with an eye to history recall the Barber boom of the 1970s (named after the Tory chancellor at the time), which ended with an inflationary bust.

Truss plans to cancel hikes in employment tax and corporation tax, while taking “environmental levies” off energy bills. These measures would cost the exchequer £30 billion ($36 billion) a year. Debts run up by the government during the pandemic “should be hived off into a separate pool and paid off more slowly, as Britain did with its war debts,” Truss has argued. She accuses her opponent of “choking off” growth.

These refrains are music to the ears of the Conservative Right, which unfairly caricatures Sunak as a social-democratic wolf in true-blue clothing. The tax burden is at its highest level since the days of the post-war Labour government, 72 years ago. The euroskeptic Right is hungry for their preferred diet of tax cuts. They also back Truss’s plan to unpick the Northern Ireland Protocol, even if it means a wider confrontation with Brussels.

Party members once applauded the former chancellor for funding the furlough. Now they cheer Truss for her full-throated support for Ukraine and, as a born-again Brexiteer, for her dogged pursuit of trade deals with countries outside the European Union. Many who still hold a candle for Boris Johnson also blame Sunak’s “treacherous” resignation for precipitating their lost leader’s downfall and want revenge — consider that another set of votes in the “Liz-for-PM” column.

And has the economic argument already settled in Sunak’s favor? No. Truss calls him “the continuity economic policy candidate.” In an interview with the BBC, she condemned an “unhealthy consensus among the Treasury, economists and The Financial Times” for “peddling a particular type of economic policy for the last 20 years” that hasn’t delivered for Britain.

The charge sheet bears closer examination. Ever since the financial crash, Britain’s growth rate has slowed to a crawl and its productivity has lagged behind competitors — this development long preceded the country’s departure from the European single market. A look at the fundamentals is well overdue. Both Sunak and Truss, who is hardly an economic illiterate and has served in five Cabinet posts, including chief secretary to the Treasury, need to tell us how they would turbocharge the sputtering UK engine.

Is Sunak right, for instance, to embark on a five-year program to balance the budget and reduce the deficit to 80% from 96% of GDP? Many mainstream economic commentators were alarmed by his hikes in employment taxes, paid by both employers and workers in April. “It was the wrong tax, on the wrong people, at the wrong time,” said the Financial Times, and other commentators agreed.

Corporation tax rises without wider reforms of UK investment incentives could be disastrous. Even the OECD, the club of rich-world economies, which is hardly a nest of Ayn Rand devotees, has warned that tax rises this year (mirrored by no other G7 country) could push the UK into an unnecessary recession. Others point to President Donald Trump’s tax cuts which had little inflationary effect.

An economic debate will have the double benefit of forcing Sunak to show his sunnier side. After all, he advocates supply-side reforms and deregulation too. As a Brexiteer he is an advocate for Singapore-on-Thames as much as Truss is. Let’s hear more.

As the candidate for “change,” Truss’s optimism may propel her across the line first in the race to become Tory leader and prime minister. The doubters think her strategy could be tested to destruction thereafter, yet her supporters think that robust “Trussonomics” will help them win the next general election in 2024.

In anxious times, the voters need a message of hope, not only a lecture on how bad things can get and what not to do to the economy. That is the difference between the two candidates. And whether it proves to be justified or not, hope usually wins.