A war of words broke out between Rishi Sunak and Liz Truss
(Picture: ES Composite)Britain’s new Prime Minister will have to find “many more billions” to support struggling households, economists warned on Friday, as soaring inflation threatens to plunge the country into its worst economic crisis in decades.
Paul Johnson, director of the respected Institute for Fiscal Studies think tank, issued the warning a day after the Bank of England forecast that Britain is set to slide into a 15-month recession with inflation climbing to 13 per cent later this year and unemployment also set to rise.
But as a war of words broke out between the two Tory leadership contenders over how to handle the crisis, Mr Johnson suggested that rising energy bills — which analysts say could jump to nearly £3,400 a year in October — could force the candidates to do more to tackle the cost-of-living crisis.
The IFS chief told BBC Radio 4’s Today programme that he was mystified why the contest between frontrunner Liz Truss and former chancellor Rishi Sunak had so far focused on tax cuts.
“The thing that I find remarkable about the Conservative leadership debate is that they don’t seem to be talking about the things that are really going to be in need of public finances. They’re going to have to find many more billions to support households. I mean, this is a much bigger increase in energy bills than was expected even a few months ago when the support packages were announced, and that’s not going to be helped by the sort of tax cuts that are being talked about.
“Secondly, of course, there’s going to need to be more money for public services. Because with inflation at 13 per cent, and pay rises there in the five-six per cent range, that means that the level of increases that were put in place this year and announced a year ago are looking far too small.”
Ahead of the latest hustings event with Conservative party members in Eastbourne tonight, allies of Mr Sunak and Ms Truss clashed over the best way to avert the looming economic crisis.
Business Secretary Kwasi Kwarteng, who is backing Ms Truss and is widely tipped to be her chancellor if she wins, said she would offer “immediate relief financially” for households in an emergency budget, reportedly pencilled in for September 21.
But he renewed the attacks on Mr Sunak’s stance that tax cuts can only be implemented when inflation is back under control. He told Sky News: “Put very simply, you’ve got a world where prices are going up. So people’s shop, people’s energy bills are all going up. So that means that real incomes are being squeezed. Now to say to people, your real incomes are being squeezed and I’m going to put your taxes up. I think it’s just adding insult to injury. I’ve never understood why, if we’re going to help people, how are we going to help people by putting up their taxes? Just simply carrying on with our economic policy at the moment. It’s not going to cut it, it’s not going to help us get out of this difficulty.”
But Liam Fox, a former international trade secretary who is backing Mr Sunak, suggested Ms Truss was offering “magical solutions”
He said: “The question in the leadership contest... is do we maintain what is a traditional Conservative response to this? Or do we try something completely different and take a risk with the economy? It’s not going to be easy, and I think this is a key difference between candidates in this election because it’s... do you actually say it’s going to be tough and be honest with the British people? Or do you pretend that there are magical solutions?”
Ms Truss has vowed to boost economic growth by reversing April’s National Insurance rise and scrapping plans to lift corporation tax from 19 per cent to 25 per cent — a move which experts have said would cost around £30 billion.
With the Bank of England’s Governor Andrew Bailey coming under fire over the worsening economic outlook, Mr Kwarteng sharpened the Truss camp’s criticism that he should have done more to tackle inflation last year before it took off.
“So there is an argument, and I think it’s a strong one, to say that inflation was an issue that was identified at the beginning of last year,” Mr Kwarteng said, backing Ms Truss’s calls to review the central bank’s mandate.
“And the job of the Bank was to deal with inflation. They’ve got a two per cent inflation target, that’s actually their mandate. And now inflation is in double digits. So clearly something has gone wrong. And I think there is an argument to suggest the rate should have probably gone up.”
But while Mr Bailey said he would welcome a discussion with the next government over the way it performs its role, he rejected claims from Ms Truss’s allies that it should have raised interest rates sooner.
He insisted raising interest rates last year could have risked damaging the jobs market as the UK economy emerged from the pandemic and blamed global shocks including the war in Ukraine for the sharp rise in inflation. He told the Today Programme: “If you go back two years...the idea at that point we would have tightened monetary policy... I don’t remember there were many people saying that.” Asked if he would see out his eight-year term once a new Prime Minister is in office, he said: “I made a commitment. It’s an eight-year term. And that’s part of the fabric of the independence of the Bank of England.”
With Mr Sunak behind in polls of the 160,000 Tory members who will decide the race for No10 by September 5, the pollster Lord Hayward said the crisis had played to his advantage during last night’s televised leadership debate on Sky News. “I think there’s a sense that this was the first time he’d actually got the better of her,” Lord Hayward said.
“There was a sense that he conveyed the message better. There was a sense, which was conveyed in the audience and their reaction, that he had a grasp for almost steady as she goes, rather than let’s not take a risk at this point.”
