Truss or Sunak will need to deliver ‘shot in the arm’ of UK economy

Rishi Sunak or Liz Truss will need to deliver a “shot in the economic arm” of the country to lift Brits’ confidence out of the doldrums after one of them wins the Conservative leadership race, two closely watched surveys published today reveal.

Scorching inflation, the highest interest rates in 13 years and tax hikes have plunged UK consumer confidence to its lowest level since records began.

That’s according to GfK’s long-running index, which revealed optimism flatlined at minus 41 in July, the lowest reading since the firm started tracking the data in the mid 1970s.

A separate survey released today by consultancy Deloitte also found consumer confidence has tumbled to the deepest level they have ever monitored.

Severe pessimism among households underscores the tough task Sunak and Truss will face to boost the health of the UK economy after the winner of the Tory leadership contest is announced in early September. 

The “successful candidate will need to deliver a much-needed shot in the economic arm of the country if they are to help improve consumer confidence,” Joe Staton, client strategy director at GfK, said.

Households are being gripped by the worst cost of living crunch in a generation, triggered by rising living costs eroding their pay.

Figures published earlier this week by the Office for National Statistics (ONS) found real regular pay is falling at the quickest rate since 2001.

Inflation also raced to a fresh 40-year high of 9.4 per cent last month, the ONS said, raising fears the Bank of England will hike interest rates 50 basis points on 4 August, something it has not done since it was made independent 25 years ago.

The Bank has already raised rates at its last five meetings to chase down inflation, sending them to 1.25 per cent, the highest level since 2009.

“With inflation going up faster than average earnings, there are now more consumers feeling the cost of living pinch than not,” Céline Fenech, consumer insight lead at Deloitte, said.

Truss has promised to bring forward the 1p cut in the basic rate of income tax from 2024 and reverse the April 2023 six percentage point corporation tax hike. 

While that will put more cash in households’ pockets, some of the benefits will accrue to the richest, who are better able to shoulder a higher cost of living.

Sunak has promised to cut taxes once inflation is under control. Economists have warned reducing taxes will fuel inflation by stimulating consumer spending.

Income tax thresholds have been frozen for several years, which will reduce the amount of money people would receive from an income tax cut as a result of inflation pushing them into higher tax brackets – a process known as fiscal drag.