Rishi Sunak has taken over as prime minister, after a chaotic economic experiment to boost growth through aggressive, but unfunded tax cuts spooked the markets.
Trying to rebuild both investor and voter confidence in the Conservative government, he faces continued political and economic turmoil as he implements unpopular spending cuts.
With little time for international matters beyond Ukraine, Sunak will focus on ensuring the UK does not become an ungovernable country with a dysfunctional economy.
At a time of economic crisis, the UK is facing a similar period of austerity as after the 2008 financial crisis, which is likely further weaken growth forecasts.
Corporation tax will rise from 19% to 25%, with further tax rises being likely. Adding to the uncertainty about the UK investment allowance, this dissuades private sector investment.
Tensions with the EU are likely to ease, but disagreements around the execution of Brexit, in particular the Northern Ireland Protocol, will remain a source of friction with Brussels.
State of Play After the shortest premiership in history, a crisis
A ‘mini-budget’ presented in mid-September by then Chancellor of the Exchequer (finance minister) Kwasi Kwarteng contained £45 billion in unfunded tax cuts and plunged the UK into economic turmoil. The Bank of England was required to intervene with £65bn to support a large slice of the UK’s pension sector left vulnerable by the bond market’s instability. Moreover, the yield of long-dated UK government bonds known as ‘gilts’ rose sharply from 3.5% to 5%, adding billions to the UK’s borrowing cost. Kwarteng was sacked on October 14, and his replacement, Jeremy Hunt, immediately tore up most of his ideas. On October 20, after only 44 days in office, Liz Truss announced her resignation as Prime Minister, and former Chancellor Rishi Sunak was chosen by Conservative MPs to replace the party rival who beat him in the leadership race this summer. Having repeatedly warned against Truss’ debt-driven growth agenda, Sunak will send Hunt to announce a medium-term fiscal plan by the end of the month. This will likely include big spending cuts and tax increases to bring the fiscal situation under control, ushering in a period of austerity similar to that which followed the 2008 financial crisis.
Key Issues The new government will bring macro-economic stability but faces significant challenges
Prime Minister Sunak’s priority is to restore investor confidence in the UK and voter confidence in the Conservative Party. Neither will be easy. Both he and his Chancellor want to prove to the markets that the government is a responsible debtor in order to reduce its current borrowing costs. But Sunak faces a bleak winter of difficult choices because of spiraling inflation, stagnating incomes, labor shortages, an increase in strike action, a record seven million people waiting for hospital treatment, a backlog of 61,000 criminal cases in the court system, the possibility of energy blackouts over the winter months, a government-funded energy support package for households and businesses due to end in March when energy prices will increase significantly, and decades-long structural problems of low productivity coupled with insufficient investment in skills, infrastructure and innovation.
Disquiet in public and media about yet another change of prime minister continues – Sunak is the third officeholder in just two months. Calls for an early general election before January 2025 are growing louder, not just from the opposition but also the general public. However, current polling points to the loss of more than half of the Conservatives’ 357 seats, thus making a new poll a suicide mission. Also, at a personal level, Labour leader Sir Keir Starmer is thought to be the better prime minister by 38% of the people compared to 29% for Sunak. The latter still has something going for him, besides appearing as a ‘steady hand’ throughout the latest turbulence and as the one who oversaw a generous furlough scheme during the Covid-19 pandemic. He is also, not insignificantly, the first UK prime minister of Indian-origin and the first Hindu to occupy the office. However, a former Goldman Sachs banker and hedge fund manager who is married to a billionaire’s daughter, Sunak can appear to be aloof when regular Britons are wrestling with a cost-of-living crisis and do not know how to get through the winter.
Struggling to avoid irrelevance as an international partner
Sunak will also try to bring clarity to the UK’s international policies to restore the country’s reputation, as investors, politicians and analysts fret about the UK turning into a dysfunctional economy and state. Despite being a leading supporter of Brexit, the new prime minister is expected to follow a conventional, less controversial approach to international affairs. Mindful of growing public support for a more pragmatic rather than ideological relationship with the EU and given the state of the economy, he wants to avoid a trade war with Brussels.
Nevertheless, Euroscepticism remains powerful within parts of the Conservative party, as the difficulty of ‘getting Brexit done’ is one of the reasons behind the succession of Conservative prime ministers since the EU referendum of 2016. Sunak will continue the UK’s participation in the newly established European Political Community of EU and Non-EU members. The UK’s strong support for Ukraine will remain, but Sunak has only committed to defense spending not dropping below 2% of GDP so some cuts are expected. Despite this, relations with the USA will remain close, especially on military cooperation and over China, with Sunak proposing a ‘NATO-style technological alliance’ against Beijing’s ambitions. However, prospects for a UK-US trade deal have faded. Whether his Indian roots and prominent family – his father-in-law is the owner of the global IT firm Infosys – will win him any friends in the Commonwealth or, more broadly speaking, the Global South will depend on his success at home. The “levelling up” that his predecessor-by-one planned to administer to the UK’s de-industrialized areas may soon be something that the entire country needs.