Rishi Sunak and Liz Truss want to replace Boris Johnson. Neither has “a real plan” to fix their ailing economy

But Ethan Ilzetzki, associate professor of economics at the London School of Economics, believes that the leadership debate remains “decoupled” from the nature and scale of the economic challenges: decades of stagnation in productivity levels will not be easy to resolve.

“None of them have any real plan other than cutting taxes,” he told CNN Business.

“It’s all about the size of the taxes, the size of the government. These are important questions… [but] There is no easy solution in terms of tax cuts to the deep problems we have here,” he said.

While some of the troubles ailing the world’s fifth-largest economy will be largely out of Sunak’s or Truss’s control, they have made bold promises to Britain. Can you deliver them?

Global Energy Prices

Sunak, the government’s former finance secretary, said tackling inflation is his top priority – annual consumer price inflation in the UK hit another 40-year high last month, hitting 9.4%. This is the fastest increase among the G7 countries.

But Sunak’s options are limited, if not non-existent given the UK’s exposure to global energy prices as a major importer of fuel.

“We import this inflation,” Sanjay Raja, UK chief economist at Deutsche Bank, told CNN Business.

The Bank of England has hiked interest rates five times since December to stem spiraling prices. She expects inflation to top 11% later this year. But his powers are limited, says Raja.

“Britain, as a small, open economy, cannot do much [it] cannot supply and manufacture these goods to limit the price increase to offset this inflation,” Raja said.

The country spends more on importing goods than it earns on its exports. Skyrocketing fuel costs have helped Britain run a trade deficit of 8.3%, the largest since the Government Statistics Office began keeping records in 1955.

Add to that a weakened currency – the pound has lost nearly 12% of its value against the US dollar since the start of this year – and the country can expect the cost of its imports to rise while its exports could become more competitive in the global market.

“There’s a lot more money going out than in,” Maria Demertzis, interim director at Bruegel, an economics think tank, told CNN Business.

The UK has effectively dived into its savings, Demertzis said, to help it absorb the shocks of recent months. This is only a problem if it lasts much longer.

But global energy prices are showing little sign of slowing down in the near term. Stunning wholesale costs for natural gas have pushed up annual energy bills for millions of UK homes by 54% this year. Bills are expected to rise back above £3,000 ($3,572) in the autumn, according to energy research firm Cornwall Insight. Brits have tightened their belts in response, spending less in supermarkets and canceling their streaming subscriptions. In fact, between March and May, real wages — workers’ wages that take inflation into account — suffered the biggest drop in more than two decades, official data showed this week.

To tax or not to tax

Truss hopes to offer a lifeline to workers and businesses, promising to cut income taxes and scrap a proposed corporate tax hike next year. But increased spending could exacerbate inflation and undermine the Bank of England’s efforts to slow the economy to curb runaway inflation.

Sunak has also promised to cut taxes, but only if inflation is brought under control.

The Institute for Fiscal Studies (IFS) has estimated that Truss’ total tax cuts would amount to £30 billion ($36 billion). She has not presented any plans to cut public spending to offset the drop in tax revenues.

It’s appealing news for the millions struggling to make ends meet, but its critics say the moves would further fuel inflation and increase national debt, which is expected to reach £100bn this year.

In June, inflation pushed interest payments on public debt to the highest level on record by the government 25 years ago.

“Certainly [cutting income tax] would strengthen incentives to take up work and earn more, although these effects would be far from sufficient to be able to amortize the reform,” the IFS said in a statement on Thursday.

Ultimately, if Truss wins and doesn’t cut spending, reality would bite, the IFS said. “But in the end, lower taxes mean lower [public] expenses,” it added.

slump in productivity

Despite a modest increase in UK GDP in May, the latest month for which data are available, fears that the country will slide into recession have not gone away.

But one of the biggest growth drivers – productivity – has stagnated since the financial crisis of 2008.

“The core of economic growth is productivity growth,” Dean Turner, Europe and UK economist at UBS Bank, told CNN Business. Productivity measures the output per unit of capital, labor or other inputs.

According to the Office for National Statistics, output per hour worked in the UK grew at an average annual rate of 1.9% over the decade to 2007, but fell to 0.7% in the decade following the financial crisis. This is the second slowest growth in the G7 after Italy.

Turner said Britain needed to “rethink”. [its] of the entire economic model” to increase productivity.

“The fact is we’re just not investing enough, we’re not doing enough research and development in the UK and that’s something that’s holding back our productivity growth,” Turner said.

Greater productivity would be a boon for workers. Firms could produce more with the same number of employees and afford to pay them higher wages.

Despite high inflation, average wages are no higher today than they were before 2008, the Resolution Foundation said in a report this month.

Ilzetzki said more investment in innovation, research and development, and providing job training for the workforce would help boost productivity and encourage immigration.

But none of Truss and Sunak’s proposals would “even slightly undermine the deep structural challenges facing Britain,” he said.

Brexit still unclear

According to Ilzetzki, a key priority for the next prime minister should be “clarifying once and for all Britain’s relationship with its larger trading partner, the European Union”.

Truss, who voted to remain in the EU in 2016, has been a staunch supporter of Brexit ever since. She is urging tearing up the Northern Ireland Protocol – a piece of legislation at the heart of the EU Withdrawal Agreement the UK signed in 2020 – which allows goods to flow freely between Northern Ireland and the Republic of Ireland.

The protocol keeps Northern Ireland bound by EU rules for internal trade and means goods moving between the country and the rest of the UK must be inspected.

Critics argue that the agreement effectively creates a maritime border within the UK and comes with onerous costs and paperwork for businesses.

Truss, who served as the UK’s Foreign Secretary earlier this year, introduced legislation promising to “end the unsustainable situation where people in Northern Ireland are treated differently than the rest of the UK” and to uphold the “territorial integrity” of the protect country.

However, a repeal of the protocol could lead to retaliation from the EU by imposing tariffs on British exports. The resulting trade war would be very bad for UK businesses.

Sunak was less forthcoming about how he would handle the matter, but previously said he would prefer a negotiated solution with Europe.

The uncertainty is discouraging investment in the UK, Ilzetzki said.

“No one is going to invest in the UK for a few lower tax points unless they are sure that UK exporters will be caught up in a trade war with the EU within a year,” he added.

The twin impact of Brexit and the pandemic has also made it much more difficult for UK employers to tap a huge pool of labor to fill a stifling labor shortage. Since January 2021, all EU citizens looking for work must go through the same points-based immigration process as other nationalities. Compared to the same period in 2020, around 211,000 fewer EU nationals worked in the UK in the first quarter, while the number of non-EU workers increased by 182,000, according to official statistics.

To make matters worse, a million workers have left the labor market and many are unlikely to return. About half cited chronic illness as a reason for leaving work, according to the Learning and Work Institute.

“We’ve seen an exodus of workers unlike anything we’ve seen anywhere else in the advanced world,” Raja said.