But Truss, in a debate that same day hosted by Sky News, struck an optimistic note, saying a recession was “not inevitable.”
“We can change the outcome, and we can make it more likely that the economy grows,” she said.
What’s her remedy? A set of personal income and business tax cuts amounting to more than £30 billion ($37 billion), according to estimates by the Institute of Fiscal Studies.
Tax cuts, Truss said, will help rein in runaway prices and boost growth — a claim that’s left many economists dumbfounded.
She’s counting on these cuts to stimulate growth, encourage businesses to invest, and ultimately help bring down inflation — which the Bank of England expects to edge above 13% later this year.
But without a meaningful reduction in government spending — which Truss has not laid out in detail — “most of the economic theory we have built in the past 100 years would claim the opposite,” Grégory Claeys, senior fellow at Bruegel, a think tank, told CNN Business.
Truss has cited Patrick Minford, a pro-Brexit economist at Cardiff University whose research influenced Margaret Thatcher’s government in the 1980s, in backing her view.
But John Van Reenen, a professor at the London School of Economics, among others, disagrees.
“[She’s] wrong. It won’t decrease inflation, it will increase inflation,” he told CNN Business.
Tax cuts put more money into people’s pockets, driving up demand for goods and services. In the context of an “extremely tight,” labor market, Van Reenen said, fueling more demand will worsen inflation.
A spokesperson for Liz Truss told CNN Business that the country’s tax burden would soon be the highest since the 1940s, which would stifle business, innovation and growth.
“Liz’s tax cuts are necessary, affordable and not inflationary. Cutting taxes, incentivizing business investment will boost productivity, create new jobs and ensure people can keep more of their hard earned cash,” the spokesperson said.
Any further rises in consumer prices could pile further pain on households and spur the Bank of England to hike interest rates again, hitting those without a fixed-rate mortgage particularly hard.
Eye-watering energy prices, exacerbated by Russia’s invasion of Ukraine, have driven consumer prices up 9.4% year-over-year.
“If we also have a reputation for levying a surprise tax on any industry that makes a profit, that is a big problem for our country,” she told Sky News.
Racking up debt
Economists point to other hurdles in Truss’ plans, which include a promise to increase military spending: rising government debt.
“The effect you would get on growth [from tax cuts] is nowhere near enough for them to pay for themselves,” Stuart Adam, a senior economist at the IFS, told CNN Business.
Truss formerly served as a high-ranking minister in the country’s Treasury department, a role that has responsibility for managing public spending.
Now, instead of big spending cuts, Truss has promised to find savings through slashing waste and inefficiency in the public sector, though some of her plans have already come unstuck.
Earlier this week, Truss retracted a proposal to tie the wages of government workers to local living costs, which she claimed would save £8.8 billion ($11 billion).
Critics argued the plans would result in an effective pay cut for millions of nurses and teachers.
In the long run, Adam said, the government would need to slash its spending or raise taxes again to pay for any tax cuts introduced by Truss.
“At some point that’s got to come home to roost,” he said.
Going for growth
“Just stimulating demand [through tax cuts] isn’t a great tool for getting out of [a recession],” Adam said.
Further interest rate hikes resulting from higher inflation would be likely to reduce demand anyway, he added.
For Van Reenen, the focus on tax cuts to boost growth is misplaced. Deeper problems in the economy, including more than a decade of stagnant productivity and real wage growth, should be the new prime minister’s priority.
“It’s a bit depressing the lack of significant engagement with serious issues,” he said, referring to both Truss and Sunak’s plans for the future.