Tax policies shape up as key in race to succeed Boris Johnson

Rishi Sunak arrives to attend a hustings at the weekend. It remains an open question on whether he can convince the Conservative party base. Picture: Carl Court/Getty Images

Forget personalities.

The battle for Britain’s next prime minister has moved on. The fight now is about whether taxes should go up or go down to get the country through the latest cost of living crisis as inflation continues to climb.

And as with the energy crisis, there will be important lessons for Australia.

Vying for the top job are Foreign Secretary Liz Truss and the former chancellor Rishi Sunak. Sunak’s resignation was the final straw for Boris Johnson and the two fell out badly. Truss is a longstanding Johnson supporter.

Both Truss and Sunak say they are Thatcherite in politics yet their policies are dramatically different. Truss wants to lower taxes to grow the economy. Sunak argues that this will fuel inflation even further and wants to raise taxes.

Their opposing policies have divided economists in the UK.

Until now the race for who replaces Boris Johnson has been more attacks on character and poisonous briefings against one another than policy as the number of candidates whittled down from six to two. The Sun newspaper described the fighting as like rats in a sack and so damaging was this to the Tories that the government cancelled a television debate.

In the next six weeks Sunak and Truss have to win over the 175,000 Conservative party members who will decide the next leader on September 5, with Sunak the underdog. Their pitch has moved from personality to who has the better economic policy.

Whoever does win inherits a poisoned chalice. Australia’s energy crisis and inflation problem is nothing to Britain’s. Inflation is running at 9.4 per cent in the year to June. And winter is coming.

The disastrous result of Russia cutting gas supplies to Europe has caused UK home energy bills to soar so much that by October one in three British households could be pushed into energy poverty according to one Bloomberg report. The average annual household power bill is heading for over £3000 ($5200).

Under Johnson, Sunak wanted to reduce the huge pandemic debt and somehow fund the rising cost of the National Health Service. So government policy was to hike the national insurance levy – not unlike a rise in the Medicare levy – by 1.25 per cent and to increase company tax from a low 19 per cent to 25 per cent.

As would-be PM, Sunak wants to continue with these policies with targeted subsidies for the worst off.

Truss wants to abandon the tax increases and she is prepared to borrow more to do that.

Sunak says that Truss is peddling fairytale economics but he may have problems with a traditional Conservative party membership that is for a low spending low taxing government. And with those who believe that more austerity on top of rising interest rates in the UK and Europe will only bring recession.

Truss argues that higher taxes will drive away investors, smash consumer confidence and risk job losses. Hers is the true Thatcherite way.

Others disagree. In Britain’s Daily Mail, former chancellor Norman Lamont – who backs Sunak – argues that Thatcher used to say sound finance and controlling the deficit had to come before tax cuts. Lamont says Thatcher actually raised taxes (including a windfall tax on oil companies) early in her leadership despite a recession, yet the economy grew.

The Truss camp counter that borrowing to cut taxes would not be inflationary because growth is sluggish and increased budget deficits of themselves do not cause inflation. Too much money in the system causes inflation, which is the legacy of pandemic stimulus.

They say tax cuts can be targeted and will not be inflationary because Britain’s inflation today is not driven by high consumer spending, but from spiralling fuel and commodity prices.

Some economists suggest Truss’s plan to cut national insurance bills and stop a company tax hike could actually boost supply of goods and services and lower inflation, not increase it. But the Sunak camp only sees rising inflation from tax cuts that will force the Bank of England to go harder on interest rates, risking recession.

Whoever becomes prime minister will have to move fast on a cost of living crisis for those most at risk. Britain’s fuel duty is a whopping 29 per cent on a litre of petrol, and VAT is another 20 per cent on top. For the poorest, fuel is a much bigger part of the household budget.

Truss is offering help with household power bills by suspending green levies that make up 25 per cent of the bill. For those worried about losing the red wall seats won from Labour this is astute politics.

Cutting consumption tax could increase spending and put upwards pressure on inflation. But because much of the inflation comes from external factors, cutting VAT and fuel taxes in the short term could be one way to reduce inflation.

In Australia, Jim Chalmers tells motorists to expect the 22 cent petrol levy to be reinstated in September. Warning of confronting new official figures to be released next Thursday, the Treasurer has so far declined to detail new cost of living measures.

It would be fascinating to see both the Sunak and Truss policies play out in parallel but this is not an experiment. Whether Sunak’s persuasive argument is enough to sway the membership is very unclear.

At least for now, the race has moved on from carping at Rishi Sunak’s £490 Prada suede shoes worn to a building site or Liz Truss’ Thatcher-like wardrobe for the debate.