Liz Truss, the Tory leadership frontrunner, claimed on Thursday that she can avert a recession if she becomes prime minister, on the day the Bank of England warned that Britain was facing a protracted downturn.
Truss has promised immediate tax cuts if she wins the contest, and told a Sky News leadership debate that the BoE’s projected downturn, which could last throughout next year, could yet be averted.
“It’s extremely worrying but it’s not inevitable,” she said during the televised event in which she sparred with her rival Rishi Sunak. “We can change the outcome and make it more likely the economy grows.”
Truss promised to reverse plans by Sunak, the former chancellor, to increase corporation tax from 19 per cent to 25 per cent, while also scrapping green levies on energy bills and a national insurance rise.
But Sunak replied that Truss’s plans would make inflation worse. “We in the Conservative party need to get real and fast,” he said. “The lights on the economy are flashing red and the root cause is inflation.”
He admitted that his refusal to offer tens of billions of pounds of tax cuts was costing him politically, but he said: “I’m worried that Liz Truss’s plans will make the situation worse.”
Sunak is trailing Truss in all opinion polls of party members, with some suggesting that the foreign secretary has a lead of 30 points or more. But, after the Sky News debate, the audience of Tory members, on a show of hands, significantly favoured Sunak over Truss.
The foreign secretary rejected calls for an increased windfall tax on energy companies and recommitted to reversing Sunak’s corporation tax increase, which would have raised £17bn.
But she said that if there was “any more [money] available” she would do more to help people facing rocketing household bills, notably on domestic energy.
Sunak, in a sparky performance, defended his decision to resign from Boris Johnson’s cabinet, saying he was not prepared to defend the prime minister’s lies in relation to the Chris Pincher sexual harassment case any longer: “It was wrong,” he said.
The darkening economic outlook is dominating the leadership contest and Sunak hopes he still has time to convince the membership, thought to number more than 150,000, that he is the right candidate for perilous times.
Only one member of the audience had received a ballot paper, suggesting the former chancellor still has time to try to retrieve the situation.
Britain faces a protracted recession and the worst squeeze in living standards in more than 60 years after the Bank of England raised interest rates sharply and forecast that inflation would hit 13 per cent by the end of the year.
The bank’s nine-member Monetary Policy Committee voted 8-1 to raise interest rates by 0.5 percentage points to 1.75 per cent on Thursday, the biggest increase in 27 years.
The bank forecast that the country would slide into a 15-month recession later this year, with GDP shrinking by more than 2 per cent from peak to trough. Consensus Economics, which averages leading economists’ forecasts, projects that the US will grow by 1.5 per cent and the eurozone by 1.7 per cent in 2023.
The BoE said that, because of the latest surge in gas prices driven by Russia’s curbing of supplies, inflation was expected to rise above 13 per cent at the end of the year — much higher than its May forecast. It would remain at “very elevated levels” throughout 2023 before falling back to the 2 per cent target in two years’ time.