Tax brakes: Britain’s PM contenders on the economy

Hello and welcome to The Intelligence from The Economist. Today, from London, I'm your host, Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world. In Ethiopia's northern region of Tigray, a vicious, nearly 2-year-old civil war continues to grind on. 1,000 kilometers away, Addis Ababa is undergoing a radical makeover. We ask why the prime minister is spending so much capital on the capital. And it's never seemed quite right that a mentally challenging day can make you feel just as tired as a day of manual labor can. But the pencil pusher's struggle is real. Thinking hard really does take it out of you. And now scientists think they know why. First up, though. Britain is getting ever closer to having a new prime minister. It's been well over a month since Boris Johnson tendered his resignation with characteristic flair.

Hasta la vista, baby.

Thank you.

The field of replacements was swiftly thinned down to two. The former chancellor or finance minister, Rishi Sunak, and the foreign secretary, Liz Truss. They have been traipsing up and down the country making their case to the 160,000 or so members of the Conservative Party who will make the decision early next month. As of today, our interactive poll tracker suggests that Ms. Truss has about a 90% implied probability of clinching it. Mr. Sunak, just 10. Whatever the outcome, Britain's new leader has a tremendous challenge in shoring up the country's economy.

Britain is really close to picking a new prime minister. The two candidates are Foreign Secretary Liz Truss and former Chancellor Rishi Sunak.

Soumaya Keynes is The Economist's Britain economics editor.

When it comes to their policies, their economic policies, there are actually some fairly big differences between them. Essentially, you've got this technocratic Rishi Sunak competing with something of an economic maverick in Liz Truss.

Before we go into what it is that divides the maverick from the technocrats, what about the British economy? What kind of economy are they inheriting?

Yeah, things are not looking good for the British economy. You've got a short-term crisis, you've got rising energy bills. Essentially, Britain has become poorer, and so the government is just having to choose how to distribute the pain. That's really not fun. You've got that contributing to really high levels of inflation. In July, the numbers just came in, inflation reached 10.1%. That's the highest rate in 40 years. But then you've also got this really long-term problem of Britain's stagnant productivity growth. What that means is when the economy isn't growing very quickly, if you want decent public services, you need to have high taxes. And then you've just got this whole host of other crises. You've got the problems with the NHS, You've got the net zero transition that somehow got to happen, and you've got relations with the EU that are rumbling on and very much not resolved.

Okay, well, let's start then with the former Chancellor, Rishi Sunak. What's his platform? What's he planning?

Rishi is really the wonk of the contest and also the continuity candidate thinking about current government economic policy. He was the Chancellor and obviously crafted the current economic policy, so it's not surprising that he would be extending it. And what that means is in response to the cost of living crisis with rising energy bills, he would expand cash support for the neediest. So that means higher payments to pensioners and, and families on benefits. He's also announced a cut to value-added taxes on energy bills. That's 5% off the total bill for households. But that kind of tax cut really won't help the poorest as much as they do need it. There was one estimate that the poorest fifth of households are going to face an inflation rate of 18%. That's an extraordinary increase. And so you do really need that spending to cushion them.

So those are the policies for the short term. What about the, the longer-term problems you were talking about?

Yeah, so in the long run, his agenda again is what he laid out while he was Chancellor. So that's focusing on encouraging business investment by introducing incentives within the corporation tax system, stronger incentives for investment. He also wants promote research and development innovation with the help of government. And then also he wants more focus on skills, so allowing technical colleges to flourish, more funding for that, and then also changing the education system so that teens take maths and English right up to the age of 18. He also talks a good game on deregulation. He thinks that there should be financial services reforms so that it would be easier to invest institutional capital, things like pension funds, into promising new businesses. And that would help Britain's corporate environment to thrive. But unlike Liz Truss, his competitor, he's only promising tax cuts quite far into the future. He wants to cut income tax from 19% in 2024 to 16% by the end of the next parliament. That's in 2029. But he's not claiming that his tax cuts would somehow generate growth, right? It would be the kind of extra growth that would allow him to enact those tax cuts.

Okay, let's move on to the Maverick Programme. What is Liz Truss planning?

Mainly tax cuts. That's her favourite policy. She has said that in response to the short-term cost of living crisis, she would cut green levies from energy bills. Wouldn't save households that much, but still, that's her step one. Then step two would be looking at ways to expand the supply of energy. So looking at fracking, looking at North Sea at gas supplies, whether they could be increased. I'm slightly sceptical that that could happen very quickly. Bear in mind that energy bills in Britain are due to go up a lot October 1st. And then only last would she look at spending to protect the neediest. She's given herself room for manoeuvre. She could spend more to protect the poorest, but she's been much more reluctant to state that explicitly.

And for her part, the solutions for the longer-term issues that Britain faces?

Tax cuts again. She wants to scrap a planned increase in corporation tax. She wants to reverse an increase in National Insurance contributions. That's a payroll tax. She's got this idea that these tax rises are somehow choking off growth, and so she wants to unleash the British economy. She's also got this kind of fairly high-level, vague agenda about deregulation. She thinks that utilities could be regulated better. She wants to introduce full-fat free ports, which the government already has a version of this policy, but she wants to make them bigger, bolder, better. These are low-tax investment zones where you have loose planning regulations and tax incentives. And I think in her version, there would be fewer restrictions on what kinds of companies could invest in those zones and get the kinds of tax benefits. The obvious criticism that can be levelled at that policy is that you end up just displacing activity, you end up pulling investment from A to B rather than generating new investment. Now, maybe that could go along with some kind of levelling up redistribution agenda, but I think the idea that it will generate long-term sustainable growth is much more suspect.

The polls seem to be fairly consistently indicating that, that Ms. Truss has an edge here. They, I would gather, like the sounds of these plans. Who doesn't like the sound of tax cuts?

Everybody does like tax cuts. And, you know, it's worth saying that what's happened here is that Rishi Sunak started out with this very consistent message that fiscal conservatism was the right way to go, and he thought that it would be irresponsible to announce big tax cuts. And then when he discovered that voters didn't actually really like that message, he swerved a bit and so is now announcing this long-term cut to income tax. He would say it's consistent because it's after inflation will have been brought under control, but I think there was some headlines screaming U-turn for a while. But ultimately, his policies for growth, they're more specific. But what's happened here is that the voters are not making a sophisticated judgment of, you know, which policy will please the wonks most. They're picking between who they think is the better politician. And frankly, Liz Truss has run a better, more consistent campaign. And that's why it looks like she probably will be the next prime minister.

And I know it's not just the British economy you've been thinking about this week. You're also hosting our sister show Money Talks.

I am indeed. Thanks so much for asking. Our latest episode came out yesterday. We are going to be taking a deep dive into what's been happening with China's property sector. Really, really fascinating. There have been all these mortgage boycotts, people just refusing to pay their mortgage. I know you spoke about that on this show, and we're talking about what that could mean politically for the Chinese Communist Party.

Tameya, thanks very much for your time.

Thanks for having me.

The situation in Tigray, the northern province of Ethiopia that's the site of a civil war and a humanitarian catastrophe, isn't getting much better. Yesterday, the head of the World Health Organization, Tedros Ghebreyesus, a native of Tigray, called it the worst disaster on Earth.

But in terms of humanitarian crisis, I can tell you that the humanitarian crisis in Tigray is more than Ukraine without any exaggeration. And I said it many months ago, maybe the reason is the color of the skin of the people in Tigray.

Ethiopia's government has been fighting the Tigray People's Liberation Front, or TPLF, since the end of 2020. Yesterday, the government said it wanted to strike a formal peace agreement with the TPLF, but the group accused it of violating a fragile truce by shelling Tigrayan military positions. In the war, there have been accusations of deliberate choking of humanitarian aid, even of ethnic cleansing, which is what makes what's happening in the country's capital, Addis Ababa, all the more incongruous. From an aesthetically designed national defense headquarters to major highways. This is the first video on the YouTube page of Ethiopia's Prime Minister, Abiy Ahmed. To a state-of-the-art science and technology museum. It's a glossy 23-minute video showcasing the 12 most impressive megaprojects in Addis Ababa, all thanks, of course, to Abiy himself.

Well, I lived in Addis Ababa for almost 6 years, and the transformation over that time, and particularly in the last 3, 4 years since Abiy Ahmed came to power, has been really quite remarkable.

Tom Gardner is The Economist's Horn of Africa correspondent.

Each successive regime has sought to remake it in its own image. That trend has continued with Prime Minister Abiy Ahmed, who came to power 4 years ago. He too is remaking Addis Ababa. It's starting to look a little bit like Dubai or a gleaming metropolis in the Gulf somewhere. That seems to be the aesthetic he's going for. And it's been really quite striking over the last few years how radical that facelift has been.

So tell me about some of the changes that are going on.

Well, for example, Shega Park. This is Addis Ababa's newest and glitziest public space. Walking around that is like an encounter with an idealized vision of Ethiopia's future. It's an artificial lake. You have high-rises in the distance. You have sweeping lawns and a botanical garden. And a view over all of the city, in fact. Moving above you, you have the palace of Emperor Menelik II, who founded the capital in the late 19th century. That's been turned into a museum, or one of the first of several new exhibition centres. You have a massive public library opening just down the road, a science museum, an amphitheatre. And there are parks and green spaces germinating all over the city. And the swishest of these is set on nearby Mount Toto, which overlooks the city. It boasts hiking trails, adventure sports, boutique restaurants, a luxury resort. And then at the same time, you have government offices. These have all been spruced up. You have public thoroughfares splashed with color, adorned with flowers and murals. And the city's historic central plaza Mescal Square was lavishly refurbished at the cost of more than $73 million last year. That's a striking sum, I should say, for a country in the midst of a civil war.

Why is Abiy spending so much time, so much focus on the city?

I see this as a tool for building political legitimacy. I mean, there is a big question mark over the legitimacy of his government. He's imprisoned opponents. So refashioning the capital for him is a political project. It's not just an aesthetic one, though he has described it like that many times. So, for example, in an interview in August 2020, he said we need to make Addis Ababa live up to its name. Addis Ababa means new flower. And he was stressing that we need to show that Addis Ababa can become that place that lives up to that name. You can see glossy promotional videos. Which depict the renovation scheme as a symbol of national unity. That's a more obviously or explicitly political message. And again, actually, in the run-up to elections last year, which the ruling party won over 90% of the seats contested, state media was broadcasting drone footage of the revamped city at the top of the evening news. So I believe that the renovation of the city is like a keyhole into understanding Abiy's ideological dare I say, theological worldview, because I also think it has a religious dimension to it as well.

What do you mean by that?

Well, Abiy is an evangelical Christian. He comes from the prosperity gospel school. In fact, he renamed the ruling party the Prosperity Party. I spoke to Tekle Negar of the Ethiopian Graduate School of Theology, and he argued that the stress on urban aesthetics reflects the tenets of the prosperity gospel. This idea that earthly splendor and divine favor are closely entwined. So that is to say, a clean and shiny Addis Ababa is a step on the road to both heaven and to a peaceful, prosperous Ethiopia.

And it sounds like it's a pretty pricey step. I mean, what's the, what's the bill for all of this?

Well, it's not exactly clear, I should say, but the first phase of the redesign was estimated to have cost $1 billion. A lot of questions have been asked about where the money's coming from. Abiy has pointed out when he's been asked that much of the cash is from private sources or overseas from close allies China and the United Arab Emirates. But for sure, Ethiopian taxpayers are on the hook too, even as their conflict-hit economy collapses. Yet Abiy, when questioned about this, he fired back at his critics. He said, people don't believe our development activities until we show them completed. We are doing this so that we can show that we can deliver on our promises, that we can fulfill our good intentions and show Ethiopia the level it deserves.

And what does the public make of all this?

I'd say it's provoked mixed reactions from Ethiopians. For sure, few question the value of more or better used public spaces. So for example, the land beneath Sheger Park, for instance, that had been languishing idle for years. So the transformation there is welcome. But at the same time, for the past nearly 2 years, the country has been in civil war, before that riddled with conflict. And I think people question the priorities to a great degree. And as the Prime Minister's personal popularity has diminished more recently, I think people have really started to wonder why he focuses to a very high degree on projects which essentially benefit a small portion of the population.

And presumably there's more of those projects in the pipeline.

Yes, for sure. The government has recently opened a swanky urban design center. It's now holding competitions for major public developments, most of these in the inner city, massive plans to redevelop the inner city. But also, Abiy was recently revealed to be building himself a luxurious new palace in the hills around the city, complete with 3 lakes, vast gardens, which recalls, I should say, one of his predecessors, Emperor Haile Selassie, who also sought to transform the city in his own image. I'd say Abiy seems to have a a similar sense of his own place in history.

Tom, thanks very much for your time.

Thank you, John.

When you come home from a long day at work, you're mentally exhausted. All you want to do is sink down into the couch, watch TV, make no decisions. Just let your brain rest.

Abby Berthix writes about science for The Economist.

You're not necessarily physically tired, but you're mentally tired. And scientists have pretty well understood what happens when you're physically tired, but explaining what is happening in your brain when you're mentally tired has been less well understood.

So what's the working hypothesis on what mental fatigue is all about?

So up until now, we looked at mental fatigue just like how we looked at physical fatigue. We think, okay, so your brain is working, it's expending energy in the form of glucose, and at some point that energy runs out and then you hit that block, you're mentally tired. But the problem with this version of events is that one recent compilation of studies suggests that brains that are super exhausted, a brain that has worked all day, cognitively depleted, it uses less than 1/10 of a Tic Tac's worth of extra glucose compared to the non-overworked brains. So basically, there's no real difference in glucose depletion with mentally fatigued and non-mentally fatigued brains, suggesting that it's probably not the energy stores that are the cause of the fatigue.

So if this is not a matter of fuel goes in, fuel gets used up, then what is going on here with mental fatigue?

Well, Scientists have been trying to figure this out, and a group of scientists took a neurometabolic approach. So rather than looking at the glucose and the energy, they're looking at all sorts of other chemicals that are existing in the brain, trying to figure out if something was being amassed or if something was being depleted more than usual. In particular, they were interested in neurotransmitters, which basically are the way that signals are sent back and forth between neurons. And they thought that perhaps some of these neurotransmitters might be amassing more than usual or depleting more than usual, which presents itself behaviorally as fatigue. And that's what they set up an experiment to try to figure out.

Okay, so what's the experiment to look into this?

So the first part was they had to cause this cognitive fatigue, and they did that by making the participants of the experiment do cognitive tasks. So they collected a group of participants and they put half of them into an easy group, which meant they were gonna be relatively relaxed and not thinking too hard. And then they made the other half think really hard. And they made all these participants answer questions for about 6.5 hours. One of the tasks that they used to induce cognitive fatigue was a letter matching task. So on the screen, a letter was shown every second or so. And the participants that were assigned the easy task were asked, does this letter match the letter that was shown right before? So if an E was shown, then an F, and then an E, they would answer no all of those times because there was never the same letter shown twice in a row. And then for the participants that were assigned the hard task, they were asked, does this letter match the letter that was shown 3 letters ago? So these people had to think, they had to keep things in memory, keep track of things. They were working hard mentally. And then throughout the course of the experiment, both groups of participants are periodically asked to make decisions that reveal how cognitively fatigued they are. For example, they might be asked to choose between earning €50 for biking for 30 minutes at power level 6, which is pretty difficult, or €37 for biking at power level 2, which is pretty easy. The hard task participants are more likely to choose the low-cost, low-reward option. So power level 2 for €37. And the easy task participants are more likely to go for the high-cost, high-reward option. And there's actually a lot of research on cognitive fatigue in endurance athletes. And having to push yourself hard for like 30 minutes is often more of a question of whether you're able to mentally endure that versus your body's physical limits. So this confirms that the people who are working cognitively harder end up more cognitively fatigued. And then while all of this is happening periodically throughout the experiment, brain scans are also being made to determine the concentrations of the different neurotransmitters. In the different parts of the brain.

So we have a pretty good assessment then of how evidently cognitively fatigued these, these two groups are. What do we learn from the brain scan part of things?

Yeah, so we definitely know that the participants doing the hard task are more cognitively fatigued. And then the scientists were able to use a technique called magnetic resonance spectroscopy to look at what is happening biochemically within the brain. And the scientists' analysis showed that there were higher concentrations of a certain neurotransmitter called glutamate in the synapses, in particular, of the hard group's lateral prefrontal cortex, the decision-making area. So this provides evidence that cognitive fatigue might be associated with increased glutamate.

Okay, so we've found the villain in question. It's piles and piles of glutamate, not unlike, I guess, lactic acid in the muscles, right? So is it just a matter of getting rid of it?

Yeah, so too much glutamate is probably a bad thing, just like the lactic acid in muscles. And so the brain might be doing some sort of cost-benefit analysis, very loosely speaking, where when glutamate is increasing, it increases fatigue in order to add cost to the mental effort so there's no more glutamate accrual. So basically the fatigue is a signal by the brain to stop working so that it can restore balance to itself. and then the brain is able to recover back to normal levels.

So is there no shortcut, no magic trick to reduce those glutamate levels and feel recovered?

That's actually probably a really fruitful area of future research, looking into how the brain goes about reducing glutamate levels back to normal and maybe looking into developing and concocting some potions that might speed up that process along its way. But for now, sleep is pretty much the only way that scientists know that restores the brain to normal. It is kind of miraculous and poorly understood. So if you're ever feeling mentally fatigued, no willpower, no self-control after a long day's work, the best remedy is the most proven one: a good night's sleep.

Abby, thanks very much for your time.

Thank you, Jason.

That's all for this episode of The Intelligence. Let us know what you think of the show. Drop us a line at podcasts@economist.com or leave us a rating wherever you listen. We'll see you back here tomorrow.