Is Truss or Sunak Better for the Economy?

Not only does Britain boast a chequered economic history, but the country’s fiscal performance has continued to fluctuate wildly since the financial crisis of 2008.

This means that many Prime Ministers have come to power at a time of economic crisis, with either Rishi Sunak or Liz Truss likely to join this illustrious list in September.

When Harold Wilson took the reins in 1974, for example, the country had been plunged into a three-day working week and inflation had peaked at 16.04%. Margaret Thatcher also took charge after the so-called “Winter of Discontent”, which had also triggered a sustained and marked hike in inflation.

Sunak and Truss will face their own unique meld of economic and geopolitical issues when they enter 10 Downing Street this autumn, but which potential leader is better for the economy? Here’s a breakdown.

The Challenge Facing Sunak and Truss

In terms of inflation, this peaked at 9.4% in June and is expected to reach double figures by the autumn.

In fact, economists believe that the new Prime Minister will have to deal with 12% inflation almost immediately, with a further energy price hike of 65% expected to kick in around this time.

Rampant inflation has already caused real pay and wages adjusted for prices to fall at a record pace, while this trend is expected to intensify during the third and fourth quarters of the year.

Not only is the cost of food and energy continuing to rise sharply, but the Bank of England’s monetary policy decision to initiate a series of base interest rate hikes (primarily has a way of combating inflation and bringing it down to the target of 2%) will also increase the cost of borrowing and some mortgage repayments in the near-term.

These factors are also combining to weaken the pound and minimise capital inflows into the country, with this trend of particular concern for investors and currency speculators across the board.

Certainly, traders will have to factor the current economic climate and the identity of the new Prime Minister into their forex trading strategies, particularly with both offering very different solutions to the challenges facing investors, households and businesses alike in 2022.

Why Are Sunak and Truss So Diametrically Opposed?

So far, former Chancellor Sunak (whose resignation arguably precipitated the eventual downfall of Boris Johnson) has stood out from Truss and the other leadership candidates, by refusing to commit to immediate tax cuts and making the erosion of inflation his number one priority when in office.

In fact, Sunak would continue with the controversial National Insurance tax hike he pledged last year, while urging the BoE to avoid further aggressive base rate hikes due to the fragility of the UK economy and the impact that this has on the cost of borrowing.

Sunak’s plan will also focus on reduced borrowing and attempting to repay the so-called cost of coronavirus measures and lockdowns immediately, creating the type of fiscally prudent but socially damaging policy that masqueraded as austerity in the wake of the financial crash.

As for Truss, she’s pledging immediate and widespread tax cuts as a way of fuelling economic growth and increasing the amount of discretionary income available to households.

This has been described as fantasy economics by Sunak, who suggested in the most recent debate that Truss was in fact pledging unfunded tax cuts to the tune of £40 billion. This would initiate more borrowing and potentially plunge the country into a deeper and longer recession, although Truss would argue that inflationary pressures are starting to ease globally and that the UK can build on low unemployment and high job vacancies.

Similarly, it has been reported that the recent inflows into the Treasury have exceeded government expectations, suggesting that austerity-type measures and tax increases may not be immediately necessary.

Whose Vision is Best for the Economy?

Ultimately, Sunak and Truss will step into an economic mess that’s least partially of their own making, with both having played a key role in Boris Johnson’s cabinet and taken important decisions with regards to economic and energy policies.

What’s more, neither has an economic vision that’s particularly compelling or optimistic in the longer-term, especially when you consider that most job vacancies are relatively low paid and households were already struggling before rampant inflation took hold.

It can be argued that Truss is focused on short-term growth and a sharp injection into the economy, whereas Sunak’s vision offers greater long-term stability. So, investors will probably take their pick based on their own unique outlook and trading philosophy, and whether they welcome volatility or like to adopt a more risk-averse approach.

Regardless, economic uncertainty and instability is likely to continue unabated for the foreseeable future at least, while neither candidate for Prime Minister has done much to suggest that they can navigate their way out of the latest economic crisis.