Tax, Recession and Inflation. Who has got it right?

“Which will work? It is really a question of the appetite the country has for risk and the emphasis one places on solving the immediate cost of living crisis versus the long-term productivity challenge”.

A commentary for the Centre for UK Prosperity programme by Daniel Herring

Published 12 Jun 2018

By Daniel Herring

The current discussion around the Tory leader debate and their plans to tackle inflation misses the fundamental distinction between the two candidates. The debate has been characterised in the media as being between Rishi Sunak, the man who will take inflation seriously; and Liz Truss, who has more ambitious plans for immediate growth and is more willing to borrow. Sunak’s campaign has been keen to present Truss’ position as fiscally irresponsible, while Truss’ campaign have presented Sunak as being too wedded to Treasury orthodoxy.

As a result of the miscasting of Truss’ position, there has been little analysis of the true consequences of her policy platform. It deserves greater scrutiny.

Can either Liz Truss or Rishi Sunak avoid a recession? It is unlikely. Controlling inflation remains a prerequisite for long-term, sustainable growth. No matter who the Prime Minister is, higher inflation will be met with higher interest rates, which will almost certainly push the economy into recession.

But it is possible the severity and length of a recession would be different. Liz Truss has promised to lower taxes, which is widely considered to be inflationary. Her team seem to believe that, particularly in view of a tightened mandate, the Bank of England will compensate by pushing up rates even further than they otherwise might under Rishi Sunak. Higher interest rates would affect homeowners with mortgages, and businesses who want to invest. The probability is that this will make the recession deeper or longer.