21 Jul 2022

Over the next six weeks, Rishi Sunak and Liz Truss will battle to be Britain’s next Prime Minister. The contest will be about more than who replaces Boris Johnson. For the first time since at least the financial crisis, the established Conservative economic rule book is up for grabs. The choice for party members is between a slick “sound money” former Chancellor with a convincing lead among MPs, and a pugnacious tax-cutting Foreign Secretary who should, on paper, mop up the grassroots vote.

Economics isn’t the only dividing line. In this topsy-turvy contest, Remain-voting Truss has reinvented herself as the darling of the right, while Brexiteers fear Leaver Sunak will do the Treasury’s bidding and kow-tow to the EU. The good news for business is that both want to be seen as backers of innovation and enterprise. The worry may be that the leadership contest does little to bring stability to the whirlwind of British political life.

Neither camp can feel entirely confident. Truss is the bookies’ favourite. The polls of party members confirm as much. But the decision rests with a small and highly engaged electorate of just 200,000 party members that can turn quickly. A YouGov survey this week showed how fast Penny Mordaunt’s 15-point lead collapsed into a 6-point deficit.

Tory WhatsApp groups exploded

The animosity is palpable. Tory WhatsApp groups exploded after the last televised debate, decrying the blue-on-blue action. Sunak is criticised for wielding the knife against election-winner Boris, while Truss raised eyebrows for her jaw-dropping attack on a former Cabinet colleague. The challenge now for Sunak is to convince a sceptical activist base that this super-rich Treasury man is not all about taxes and can reach the corners of the country that voted for Boris in 2019. For Truss, the task is simpler but more personal: to overcome what are, by her own admission, deficiencies in her presentational style. Activists like the thought of Thatcher 2.0, but fear ending up with Theresa May redux.

I wish my successor all the best, whoever she may be

Johnson has barely concealed his wrath at his former Chancellor’s disloyalty. Relations broke down in the final weeks as the two tried and failed to craft a shared economic vision. No 10 felt Sunak was simply not committed to delivering a growth plan that could help revive Johnson’s ailing premiership. They are now on full Stop Rishi mode. “I wish my successor all the best, whoever she may be”, Johnson quipped in rehearsals for his final PMQs this week.

Truss loathes “neo-Puritanism”

An incoming Truss administration will feel brave and glitzy at first. She loathes the interfering “neo-Puritanism” of public health policies and decries “business-as-usual managerialism” on the economy. She would seek early wins in an emergency tax cut budget. Truss would also reassert her hawkish stance on China and make tough pronouncements on cutting red-tape.

A Truss win will be a victory for the Mail and Express, which pummelled Sunak and Mordaunt during the race. But the mood can quickly turn sour, and the new PM will immediately hit the buffers of the Westminster blob: consultation, parliamentary process, Treasury accounting, and the many “big beasts” who backed Rishi. Her backbenches will be nervous of any No 10 heavy-handedness after all the missteps of the Johnson era. A review of the Online Safety Bill to promote free speech is certain to attract criticism from security-conscious MPs.

Scrapping green levies on energy bills and reversing corporation tax and NI hikes will please the Tory faithful, but will have a cost. Her first task will be calming market jitters over borrowing and inflation with a judicious Chancellor appointment. No. 10 and the Treasury establishment may also be on an early collision course if she follows through plans to tighten monetary policy and clip the independence of the Bank of England. She may reach for Sajid Javid. Business Secretary Kwasi Kwarteng and Treasury Chief Secretary Simon Clarke have been steadfast supporters and will also expect a reward.

Among the other senior posts, expect jobs for her campaign chair Work & Pensions Secretary Therese Coffey, Education Secretary James Cleverly and backbench champion Dehenna Davison. Truss also gets on with Home Secretary Priti Patel, although the Home Secretary has yet to endorse a candidate. Also expect a whirlwind of excited recruits from right-wing think tanks such as the IEA and Adam Smith Institute, and look carefully at MPs around the Free Enterprise Group which Truss founded, and its archive of policy papers ready to be unleashed.

Rishi won over the party’s “big beasts”

Sunak would seek to project experience and competence after the circus of the Johnson government. His first Cabinet would have a familiar feel. He won support from more big names than any of his rivals, including Deputy PM Dominic Raab, former party chair Oliver Dowden and ex-Housing Secretary Robert Jenrick.  Michael Gove has yet to show his hand and could secure a top job if, as rumoured, he swings Rishi’s way, as are capable handlers such as Mel Stride, John Glen, Chris Skidmore and Lucy Frazer.

A Sunak win represents continuity from a fiscal point of view. His central critique of Truss has been on “something-for-nothing” economics. He will stick to his existing tax plan, raising corporation tax and National Insurance, with tax cuts before the next election – but only when the economy is growing and inflation under control. His corporation tax super-deduction will be the centrepiece of his pitch for business investment. Even so, a good strategist will encourage him to satisfy MPs with some tax cut red meat early on in his premiership, if not sooner during the leadership contest. In a similar vein, Sunak is an early freeports champion and is certain to maintain focus on areas such as Teesside to shore up the Red Wall.

Reminding party members that he (unlike Truss) was a Brexiteer from the outset, Sunak has promised a bonfire of EU laws. He wants a new Brexit Delivery Department to report during his first hundred days. This presents a risk of regulatory divergence, but isn’t new news or anything that Truss wouldn’t also attempt. In practice, a more conciliatory tone from Sunak on the Northern Ireland Protocol could avert the threat of EU retaliation that might hamper trade. Up for reform, Sunak wants to replace GDPR rules to create “the most dynamic data protection regime in the world”. He also wants to trigger “Big Bang 2.0” for the City. Sunak aims to make London once again the world’s leading financial centre by 2027. Close observers will notice this feels very much like Johnson 2.0 – the Financial Service reforms Sunak had already kicked off in the Treasury and the Data Reform Bill from the last Queen’s Speech.

Sunak has been particularly cautious in response to escalating defence spending, but as PM he will need to rise to the challenge of Russian aggression. His critics in government fear he will go soft, pointing to his concerns about the economic impact of tough Russian sanctions. An early Kyiv visit must be on the cards to reassure his doubters.

Rivals unite?

Tax and spend aside, the differences are as much about character as policy nuance. Neither want a second independence referendum in Scotland. On public services, both will redouble efforts to save money and reform practices. Truss has a personal interest in education reform and academic standards. Sunak will push on NHS reform in exchange for increased funding. They will also take a firm stance on public sector pay demands. How they handle simmering industrial relations will be a litmus test for the early days of a new administration.

Labour are feeling chipper

Labour are feeling chipper. They feared Penny most, and of the two remaining candidates believe Truss will be a weak communicator. Newly confident after the Wakefield by-election and the Durham police investigation, Keir Starmer is planning an economy speech in the next week or so that will attempt to create clear water between Labour and both Tory candidates. Yet Labour also know that their current poll lead is softer than it looks. Internal Labour polling suggests Tory voters have moved to ‘don’t knows’ rather than switching. A new PM could convert them back. Expect the party to move aggressively to steal a march on the Conservatives on big issues like levelling up, with an announcement from Rachel Reeves on industrial strategy expected at party conference.

What happens next

The BBC will host a TV debate on Monday, with the first official party hustings taking place in Leeds on Thursday. Ballot papers will land during the first week of August, and members can be expected to vote early – making the next two weeks the most important part of the campaign.

The new Conservative leader will be announced on 5 September, after which Johnson will head to the Palace to begin the handover. For regular party conference goers tired of the same-old same-old, this October’s conference in Birmingham will be electric, if a little unpredictable for those planning events.

For the new PM, events will intervene. The economy is turning, the Covid public inquiry has begun and Johnson has made it clear that he has no intention of departing the scene.

Both candidates denied they would seek an early election, but this was largely about reassuring MPs who fear for their seats. Realpolitik may change this. A new prime minister will want to make the most of any honeymoon period and secure their own mandate, pointing to a spring or autumn 2023 election if the polls look right.

For more information on how your business should prepare for the new government, contact dgilbert@hanovercomms.com