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Analysis: Two vying for the right to replace Boris Johnson. There is no ‘one real plan’ to fix its ailing economy

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But Ethan Ilzetzki, an associate professor of economics at the London School of Economics, thinks the leadership debate remains “disconnected” from the nature and scale of economic challenge: Decade-long stagnation in productivity levels won’t be easily resolved.

“None of them have a real plan except for tax cuts,” he told CNN Business.

“It’s all about the tax rate, the size of the government. These are the important questions… [but] “There is no easy fix on tax cuts to the profound problems we face here,” he said.

While some of the difficulties facing the world’s fifth-largest economy will largely be beyond the control of Sunak or Truss, they have made bold promises to the British. Can they provide them?

Global energy prices

Sunak, the government’s former Finance Secretary, said tackling inflation was his biggest priority – annual consumer price inflation in the UK hit a 40-year high last month, reaching 9.4 %. That is the fastest increase among the G7 countries.

But Sunak’s options are limited, if not non-existent, given how much the UK, as a major fuel importer, is affected by global energy prices.

“We’re importing that inflation,” Sanjay Raja, Deutsche Bank’s chief economist for the United Kingdom, told CNN Business.

Bank of England has interest rate increase five times since December in an attempt to tame the price spiral. It expects inflation to peak at 11% by the end of the year. But its power has limits, Raja said.

“The UK, as a small, open economy, there’s not much that can be done, [it] Raja cannot supply and create these goods to limit the increase in prices to offset that inflation,” Raja said.

The country is spending more on imports than it spends on exports. The sharp rise in fuel costs has helped the UK grow its trade deficit by 8.3 per cent, its biggest deficit since the government’s statistics office started keeping records in 1955.

Add to that a weakening currency – the pound has lost almost 12% of its value against the US dollar since the start of this year – and the country can expect its import costs to rise, while Its exports may become more competitive in the global market.

“There’s a lot more money going out than money coming in,” Maria Demertzis, interim director of Bruegel, an economic consultancy, told CNN Business.

“The UK has effectively saved up to help it weather the shocks of the past few months,” Demertzis said. This is only a problem if it continues much longer.

However, global energy prices show no signs of cooling down in the near term. The staggering wholesale cost of natural gas has pushed up the annual energy bills of millions of UK households 54% this year. Bills are expected to rise again in the fall to £3,000 ($3,572), according to energy research firm Cornwall Insight.
Britons have tightened their belts in response, spending less in supermarkets and quitting subscribe to streaming.
Indeed, real wages – wages of workers taking into account inflation – are subject to biggest drop in more than two decades between March and May, official data shows this week.

Taxed or not taxed?

Truss hopes to provide workers and businesses with a lifeline, promising income tax cuts and scrapping plans to raise taxes on businesses next year. But increased spending could exacerbate inflation and undermine the Bank of England’s efforts to adjust the economy to curb the Bank of England’s rapid price rise.

Sunak has also promised to cut taxes but only once inflation is under control.

The Institute for Fiscal Studies (IFS) has estimated that Truss’ total tax cuts will amount to £30 billion ($36 billion). She hasn’t laid out any plans to rein in public spending to offset the drop in tax receipts.

It’s an appealing message to millions of people struggling to make ends meet, but her critics say the moves will further fuel inflation and increase public debt, which is on track to hit 100. billion pounds this year.

In June, inflation pushed public debt payments to their highest levels since the government began holding the record 25 years ago.

“Sure [cutting income tax] The IFS said in a note on Thursday it would strengthen incentives to go to work and earn more, although these effects would not be nearly enough to make the reform pay its own price.

If Truss wins and doesn’t cut spending, the eventual reality will be unlikely, IFS said. “But in the end lower taxes mean lower [public] spending,” it added.

Productivity plunges

Despite a small increase in UK GDP in May, the last month for which data were available, fears that the country would slip into a recession have not gone away.

However, one of the biggest drivers of growth – productivity – has stalled since the 2008 financial crisis.

“At the heart of economic growth lies productivity growth,” Dean Turner, UK and Europe economist at UBS bank, told CNN Business. Productivity measures output per unit of capital, labor, or other inputs.

According to the Office for National Statistics, in the decade to 2007, UK output per hour worked increased by an average of 1.9% per year, but fell to 0.7% in the decade following the financial crisis. main. That is the second slowest growth in the G7 after Italy.

Turner says the UK will need to “rethink” [its] whole economic model” to boost productivity.

“The fact of the matter is we’re not investing enough, we’re not doing enough R&D in the UK, and that’s what hinders our productivity growth,” says Turner.

Higher productivity will be a boon for workers. Companies can produce more for the same number of employees and afford to pay them higher wages.

Despite high inflation, average wages today are not higher than they were before 2008, the Resolution Fund said in a report this month.

Ilzetzki said investing more in innovation, research and development, and job training for the workforce would be one way to boost productivity, as well as encourage immigration.

However, none of the Truss and Sunak proposals would “put a small crack on the profound structural challenges facing the UK”, he said.

Brexit is still unresolved

According to Ilzetzki, the next prime minister’s main priority is to clarify “once and for all, the UK’s relationship with its larger trading partner,” the European Union.

Truss, who voted to stay in the EU in 2016, has since become a staunch supporter of Brexit. She is pushing for the tearing up of the Northern Ireland protocol – a central legal part of the withdrawal agreement the UK signed in 2020 – allowing the free flow of goods between Northern Ireland and the Republic of Ireland. .

The Protocol keeps Northern Ireland under EU rules on internal trade and means goods traveling between the country and the rest of the UK must be inspected.

Critics say the deal effectively creates a sea border inside the UK, and involves costs and heavy paperwork for businesses.

Truss, while serving as the UK’s foreign secretary earlier this year, introduced legislation that promised to “end the unresolvable situation where people in Northern Ireland are treated differently from the rest of the UK.” Great Britain” and defend the “territorial integrity” of the country.

But this appreciation of the protocol could lead to retaliation from the EU, with tariffs imposed on British exports. The resulting trade war would be very bad for UK business.

Sunak has said little about how he will handle the matter, but has previously said he wants a negotiated deal with Europe.

Ilzetzki says uncertainty is discouraging investment in the UK.

He added: “Nobody is going to invest in the UK with lower tariffs when they’re not sure if UK exporters will be involved in a trade war with the EU within a year.”

The dual effects of Brexit and the pandemic also make it difficult for UK employers to tap into the huge pool of workers to help fill jobs. lack of labor.
As of January 2021, all EU citizens looking for work must pass the same points-based immigration process like other nationalities. According to official statistics, around 211,000 EU citizens were working in the UK in the first quarter compared with the same period in 2020, while the number of non-EU workers increased by 182,000.

Worse still, a million workers have already left the workforce, and many are unlikely to return. According to the Institute for Study and Work, about half cited chronic health as a reason to leave work.

“We have witnessed an exodus of workers unlike any other we have seen in the advanced world,” Raja said.

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I am passionate about journalism and using new technology to spread news. I am also interested in politics and economics, and I am always looking for ways to make a difference in the world. I am the CEO of Janaseva News, and I am 24 years old.

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