Conservative Leadership: Recession Needs Pragmatic Prime Minister

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There is a high probability that Liz Truss or Rishi Sink’s first task as Prime Minister will be to pull the economy out of recession. That will require them to relinquish their dogmatic approaches to tax and adopt more practical policies to minimize the damage.

The CPI inflation was 9.4 % in June 40 years and it will be at least 12.0 % in October when the off -GEM Utility Price Cap has been re -deposited. The latest evidence shows a 60% increase in cards. This will increase the average Utility Bill to $ 3150 a year on October 1, which means it is about 00 1200 more than 00 1200 and a year ago.

This easily beats the potential £1500 rise in average wages over the same period. And with the increase in the prices of other commodities, after keeping all taxes and official handouts in view, domestic revenue may decline by 3 % and 2 % next year. Never before has real household disposable income fallen by 2% in a calendar year, let alone two in a row. Such high inflation is going to be a huge blow to the real spending power of households.

Some households will be able to use their savings to increase their income. Others will have no choice but to borrow more. Most will cut costs. This is why the economy will likely fall into a recession (two quarters of declining economic activity) much earlier.

One piece of comfort is that this recession will likely be mild by historical standards, with the economy shrinking by about 1% overall. This would be smaller than the 2% decline during the recession of the early 1990s, the 5% decline in each of the two oil price shocks of the early and late 1970s, and the global financial crisis. During the crisis there has been a 6% decline.

Another consolation is that this recession is unlikely to trigger a major wave of job losses. As suitable workers have been difficult to find over the past 18 months, businesses will probably do everything they can to get them.

So on September 6, either traces or sinks go to the 10 Downing Street, the cost of life crisis will probably be closer to its peak and the economy may suffer from recession. Since this recession would be caused by high inflation, the tax policies suggested by both Truss and Sinks are not optimal. Sink plans to not cut taxes significantly until inflation is brought under control, leaving many households hanging out to dry (eliminating VAT on utility bills for a year His new pledge is a step in the right direction). And Truss plans to scrap this year’s National Insurance tax hike and next year’s rise in corporation tax rates will add to inflation.

The key will be to implement policies that help those who need it most without making the inflationary situation materially worse. A temporary increase in Universal Credit will give immediate money to those who really need it. And a temporary cut in the 20% VAT rate will have a direct, temporary, downward impact on inflation.

Both would come at a cost to the government (the cut in VAT for one year would cost 17.5%) and would likely indirectly increase inflation further. To mitigate this, such policies should be further considered with tax increases or spending cuts and the independence of the Bank of England to use interest rates to meet the 2% inflation target. Stress for

Of course, there is no such thing as a perfect policy. But discussing the various options and trade-offs would be a good place to start. And once the recession is in the rearview mirror, the next prime minister should focus more on ending productivity growth as the key to ensuring a higher standard of living for all. For that to happen, both Truss and Sink will have to put aside their dogmatic stance on taxation and show they can be a practical prime minister.

Paul Dales is Chief UK Economist at the independent global research consultancy Capital Economics.