The biggest political news this week did not come from any Tory leadership debate or hustings. Instead, it was the Bank of England forecast that the UK is heading towards a 15-month recession with inflation hitting more than 13 per cent. It points to how bleak the next year (and beyond) will be – no matter who takes over in 10 Downing Street.
The whispers of a possible early election aren’t because an election this autumn is an appealing prospect to the Tories, but because one after this economic hurricane has hit could be even worse.
Yet, the economy could play a key role in deciding which of the two candidates make it to No 10. As ballots reach members over the weekend, there are plenty of MPs who view the contest as a done deal. Liz Truss is the clear frontrunner – with both a YouGov poll and a Conservative Home poll this week putting her ahead by over 30 points.
However, Team Sunak take the view that all is not lost – they believe they are winning over waverers (with an audience of undecided Tories backing Sunak in a snap verdict after the Sky debate) and the economy is now the key battleground.
The fact that both Boris Johnson and his Chancellor Nadhim Zahawi were on holiday when the Bank of England rates rise was announced points to the vacuum currently in government when it comes to the economic storm approaching.
Even if the pair were at their desks, they would be limited in what they could really do – the agreement to Johnson staying while his successor is picked was that he wouldn’t announce new policy. It means an emergency budget is off the table.
But the worry among MPs is that even the necessary contingency planning is not being worked up with ministers in demob mode.
Instead, trying to steady the ship is a job for his successor – and the two candidates have very different approaches. During the Sky head-to-head debate, Truss raised eyebrows with her argument that a recession could still be prevented through her plan to cut taxes: “We can change the outcome, and we can make it more likely that the economy grows.”
It led Sunak to say he worried Truss’s tax cuts would lead to “misery for millions” and make the “situation worse” by putting fuel on the fire of “this inflation spiral”. To labour that point, his team have set up a gimmicky “not in your interest” website to ask voters to put in how much they have on their mortgage and then see how much more they could be paying under Prime Minister Truss – after the economist Patrick Minford initially suggested her tax cuts could lead to interest rates of up to 7 per cent.
Up until now in the contest, Sunak’s message of no tax cuts in the immediate future has failed to catch fire when compared with Truss’s far more radical approach. To members, he has appeared overly pessimistic compared to the Foreign Secretary’s optimistic pitch. In the first BBC debate, when Sunak accused Truss of £40bn of unfunded tax cuts, she played into this by accusing Sunak of “Project Fear”.
Now his team think these type of attacks will be much harder for her to land. “It’s very clear that things are going to get more difficult and it is becoming more and more difficult to accuse Rishi of peddling project fear,” one supporter says. “Just look at the economic forecasts.”
In a sign of the mood changing, one audience member at the Sky debate voiced their concerns that Truss’s economic plans could leave her children and grandchildren “encumbered with huge debt”.
The fact that Ofgem is moving to quarterly price cap announcements in of itself shows how much they expect prices to rise. This is largely due to the war in Ukraine which means it’s a problem that is very hard for any government to fix through domestic action.
It means the hope of Team Sunak is that the economy – where he is the most confident – will now take centre ground and voters will further scrutinise Truss’s plans. While her tax cuts would offer short-term relief to voters through a reversal of the national insurance hike, faced with a grim outlook, she is facing questions as to how much fiscal headroom she would really have for her proposed plans.
In a taster of the demands the new prime minister will face next month, the Institute for Fiscal Studies’ Paul Johnson has said the new prime minister will have to find “many more billions” to support struggling households.
If she goes ahead with undoing a planning corporation tax rise in an emergency budget, won’t Labour turn around and ask for billions to be spent helping the most vulnerable or increasing public sector pay?
But even with this said, Sunak’s supporters know they have a mountain to climb. It doesn’t help that he is facing negative headlines over clumsy comments he made about moving money from “deprived urban” areas.
The belief among Team Sunak is that the polls suggest the difference between Truss and Sunak is greater than it is. While no one disputes that Truss is in the lead, they believe it is more competitive than it looks.
With the debates done, the battle moves to the ground game. Sunak will be visiting as many members as he can in the coming days on the grounds that in person he has the best chance of winning waverers over. When it comes to what he will be talking about – it’s the economy that he believes is key.
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