Are the Conservatives really responsible for lower inflation?

The Conservatives are saying they have turned the economy around. But how much control do politicians really have over economic data?

UK prime minister Rishi Sunak (left) and chancellor Jeremy Hunt have a drink and biscuits during a visit to a building warehouse on 6 March 2024 in London, England.
(Image credit: Photo Kirsty Wigglesworth - WPA Pool/Getty Images)

As politicians hit the campaign trail in the lead-up to a 4 July general election, the Conservatives are wearing the improving economy as their battle standard. 

But as the pandemic recedes further into the background and higher interest rates start to have the desired effect, to what extent is this really down to them?

As he stood at a soggy podium in front of Number 10 last week, battling with the sound of a D:Ream track as it blared from a nearby speaker, Rishi Sunak’s focus was firmly on the inflation and growth picture.

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“Our economy is now growing faster than anyone predicted – outpacing Germany, France and the United States – and this morning, it was confirmed that inflation is back to normal,” he said.

The timing of the election announcement on inflation day? No coincidence, it would seem.

But how much of an impact does fiscal policy have on economic data? And can Sunak and Hunt really take all the credit? We take a closer look.

The political importance of the economy

Elections are won and lost on the basis of the economy. This is something we have seen time and again throughout history. 

There have been 27 general elections since 1922, Professor Steve Fisher points out in a recent working paper from the University of Oxford. Fourteen of these were preceded by economic crises, while 13 were not. 

In the elections following periods of economic stability, the incumbent government was re-elected 10 times. In the periods following crises, it lost nine times. Clearly, the economy is a key battleground.

This tallies up with what we’re seeing from YouGov. The research company's weekly tracker keeps tabs on the most important issues facing the country and, as of 27 May, the economy is coming in top (51%), closely followed by health (45%). 

The Conservatives understand this and, as a result, they are at pains to paint the economic narrative in a favourable light. 

This isn’t a new tactic – at the start of 2023, Sunak promised to halve inflation by the end of the year. And now that inflation is within touching distance of the 2% target, he is calling a second victory. 

Of course, the cost-of-living crisis has been one of the biggest challenges in a generation. Framing yourself as the slayer of this particular dragon has clear political benefits. 

But as voters head to the ballot box, it is important to look at the key factors that are really driving slower inflation. Do we have the government or the Bank of England to thank? Or, is it more to do with other global factors, such as falling energy prices and more normal supply chains? 

Why is inflation slowing down?

Inflation has been gradually slowing from its peak of 11.1% in October 2022, and April’s figure came in at 2.3%. That’s the lowest level in almost three years – albeit core and services inflation are proving stickier. 

We asked the experts at Capital Economics what’s driving this – and their answer had little to do with Whitehall at all. 

“A big part of the drop in CPI inflation since the peak of 11.1% in October 2022 has occurred in areas where prices are mostly determined by events overseas, such as utility and petrol prices,” said Ruth Gregory, deputy chief UK economist. 

Just last week, the Office for National Statistics (ONS) reported that the price of electricity, gas and other fuels fell by 27.1% in the year to April 2024. That’s the largest fall on record. 

Furthermore, energy prices should fall further going forward, with the Ofgem price cap being cut by 7% from 1 July. This follows a 12.3% cut from 1 April, resulting in lower bills for many households. 

But just how much does this have to do with the government? 

Of course, the government took significant steps to control energy prices between 1 October 2022 and 30 June 2023, when it introduced the Energy Price Guarantee. This protected households from the worst effects of the energy crisis and prevented the headline inflation figure from soaring even higher. 

However, the Energy Price Guarantee ended on 1 July 2023, when it fell below the Ofgem price cap. The main reason households are paying less for their energy bills today is because the wholesale oil, gas and electricity prices have fallen. 

With this in mind, inflation falling back to 2.3% has less to do with party politics than factors on the global stage.

“If there is any credit to be doled out for the fall in inflation explained by domestic events, it should go to the Bank of England which has helped to crimp domestic inflation by raising interest rates,” in Gregory’s view.

Indeed, the Bank of England raised interest rates fourteen times between December 2021 and August 2023, bringing them to their current level of 5.25%. It has now been holding the base rate at its sixteen-year high for over nine months. 

Has the government’s approach to taxation helped slow inflation?

Of course, there are some levers that the government can use too. For example, raising taxes and cutting spending can help control the rate of inflation. But to what extent has it been using the tools at its disposal?

On the one hand, Sunak (then chancellor) froze the personal tax thresholds in March 2021 in an attempt to balance the state’s books. This followed an intense period of government spending during the Covid pandemic. The tax thresholds remain frozen to this day. 

However, as Paul Johnson, director of the Institute for Fiscal Studies (IFS) told the BBC last year, higher income tax was not implemented in an attempt to slow inflation. Rather, it was put in place “for public finance reasons”. 

One clear moment when Hunt did step in was in October 2022 in the aftermath of the disastrous mini-Budget. As the UK’s newly-appointed chancellor, he took the decision to reverse almost all of Liz Truss’s inflationary tax cuts. 

The International Monetary Fund (IMF) welcomed this decision, saying that it would “better align fiscal and monetary policy in the fight against inflation”. However, this isn’t much of a victory for the Conservatives in light of the fact that the mini-Budget chaos was unleashed from within its own party.

More recently, though, Hunt has offered UK workers a string of more moderate tax cuts. In his 2023 Autumn Statement, he cut National Insurance contributions from 12% to 10%, before slashing them again to 8% in his Spring Budget this year. 

If they win the next election, the Conservatives have made no secret of their ambition to scrap National Insurance entirely

Hunt has said that the latest cuts are only possible “because of the progress we have made bringing down inflation”. However, Keir Starmer has said that any plans to scrap National Insurance entirely would amount to a “£46 billion unfunded tax cut”. 

Starmer has also hinted at similarities between this potential tax reform and the disastrous cuts made by Truss.

For now, the only thing we know for sure is that tax will be a key talking point on the campaign trail as we race towards the 4 July election. 

Both sides will want to appeal to voters’ purse strings, where they can. But they will also need to walk a careful line between winning voters around and maintaining economic stability.

Katie Williams
Staff Writer

Katie has a background in investment writing and is interested in everything to do with personal finance and financial news. 

Before joining MoneyWeek, she worked as a content writer at Invesco, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. 

She studied English at the University of Cambridge and loves reading, writing and going to the theatre.