There is one thing we’ve heard over and over again from Rishi Sunak in this election campaign: the plan is working. But what exactly is ‘the plan’?
City A.M. has had a look at what Sunak and Hunt have been saying over the past couple of years, pulling together what can, with a bit of squinting, be described as a plan.
Before looking at what the plan consists of, it’s worth making two things clear. Firstly, this is not the campaign the Conservatives are in fact running. They are running on a pledge of forcing young people into the army and (half) cutting taxes for pensioners.
Secondly, this programme is more accurately seen as Sunak’s rather than the Conservatives. In the unlikely event that Sunak wins the election, there is a whole other question about whether his priorities would survive contact with the Conservative Party.
Short term plan
On a visit to the Titanic Quarter in Belfast, Sunak was asked if he was the captain of a sinking ship. His response neatly summarised what the Prime Minister sees as his major economic achievements.
“If you look at what’s happened over the past few weeks alone, its clear that our plan is working. Inflation has returned to normal…wages have been rising faster than prices for ten months and at the beginning of the year our economy grew faster than almost all our major competitors,” he said.
These are all true, but the government can hardly take credit for it. Just as the government was not responsible for the supply shocks which followed the pandemic and the Russian invasion of Ukraine, so it cannot take responsibility as the impact of these shocks unwinds.
And while it is true that wages are growing in real terms for the first time in 16 years, productivity has not improved. Without improvements in productivity, real wages cannot continue rising without causing inflation.
On growth, it is worth pointing out that since the pandemic, the economy has grown just 1.7 per cent. In contrast, the eurozone has grown 3.4 per cent while the US economy has grown 8.7 per cent.
Investment
Ask any economist about how to improve the performance of the UK economy and they will likely give the same answer: increase investment. Indeed, Sunak himself came to a similar conclusion in his Mais lecture back in 2022. “Businesses simply aren’t investing enough,” he said.
This analysis underlies many of this government’s most prominent policies since then, including the full expensing policy announced last year and the Mansion House reforms.
Full expensing, which Hunt described as the largest tax cut for business in modern British history, allows businesses to essentially write off the cost of investment against a range of qualifying equipment. Hunt has committed to expanding this programme policy further when the fiscal position allows.
Looking back over the past eight years, the real problem for investment has been political uncertainty in the wake of Brexit. Sunak will have to control his party and provide some sense of stability if he wants businesses to invest in the UK.
Artificial intelligence
With his Silicon Valley background and his enthusiasm for STEM subjects, Sunak is better placed than most British politicians to understand the potential of new technologies.
His belief in AI is profound. “I genuinely believe that technologies like AI will bring a transformation as far-reaching as the industrial revolution, the coming of electricity, or the birth of the internet,” Sunak said in a speech delivered last year.
In that speech he tried to set out the UK’s regulatory approach. While recognising the potential dangers, he insisted that Britain “believed in innovation…so we will always have a presumption to encourage it (AI), not stifle it.”
The government has announced plans to spend £100m on developing AI research hubs as well as doubling the funding for the Alan Turing Institute, the national institute for data science and artificial intelligence. Sunak’s hope of harnessing AI and new technologies also helps explain his maths-to-18 policy.
Perhaps, though, it is not surprising that Sunak has not brought up AI much so far in this campaign. While there seems little doubt that AI could help give a major boost to growth and productivity, this might come at the expense of thousands of jobs – hardly a vote winner.
Labour force participation
The UK is the only G7 economy whose workforce has not recovered to its pre-pandemic level, largely due to the rise of long-term sickness. Getting people back into work is therefore a major priority for whoever wins the next election, both in terms of boosting growth and cutting the welfare bill.
Over the course of a few fiscal events in 2023, Hunt laid out a series of plans to improve participation. In March, Hunt expanded childcare provision so that all children between nine months and five years could receive 30 hours free care, hopefully lifting participation among parents.
Then in November, he revealed a £2.5bn carrot and stick approach to getting people back into work by boosting mental health services and cutting benefits. When taking into account the impact of fiscal drag on incentivising work, the Office for Budget Responsibility (OBR) suggests that these measures will boost the workforce by 200,000.
There’s no doubt this should be a major priority for the next government, but the problem for the Conservatives when it comes to long-term sickness is that the problem has arisen during a long period of Tory rule. So who’s to blame?
Tax cuts
The most attention grabbing Conservative policies in the past two fiscal events have been the two 2p cuts to National Insurance. Hunt has pledged to go further and abolish National Insurance, although only “when it is affordable” (i.e. we might be waiting a while).
The Conservatives clearly hope that the tax cuts will swing a few votes, but there is also a deeper rationale. As Hunt said in the most recent Budget, “we look around the world at economies in North America and Asia and notice that countries with lower taxes generally have higher growth”.
But are tax cuts realistic given the fiscal constraints? After all, the Institute of Fiscal Studies (IFS) suggests the next government will face the most difficult fiscal inheritance since the 1950s.
Hunt has only been able to meet his fiscal rules by pencilling in unrealistically tight post-election spending plans. If he wants to cut taxes again, he will almost certainly have to cut government spending even more than his current (unrealistic) plans imply.