Rishi Sunak He was appointed on Monday as the UK’s new prime minister but the challenges he faces are “racing”, such as the rising cost of living or energy prices.
As Alan Shipman, professor of economics at the Open University in the UK, explained to The Conversation, the new UK prime minister has the immediate advantage of his two years as finance minister in Boris Johnson’s government. His term expired last July due to differences with the then prime minister over economic affairs. However, he is credited, as finance minister, with a plan to save families and businesses from the effects of the Covid-19 pandemic.
This image of “saving” the nation by minimizing the loss of national production and employment during the pandemic has outweighed the less successful moments of its passage through the executive branch. But now that he has held the UK’s highest office, the economic support that allowed for the “bailout” has been greatly reduced. The government’s long-term borrowing costs, which were close to 0%, rose above 5% in mid-October, even after the Bank of England intervened. Consumer loans have also increased in prices, reducing any hope of a post-Covid recovery in investment to boost growth.
The UK now has a bad credit rating, which increases the risk premium – and thus the costs – that investors are charging on government debt. And consumers are unlikely to be able to pull themselves out of the expected recession, with millions already struggling to meet rising food, fuel, mortgage and energy bills.
So what should the new prime minister do? Having resigned from the government in July, fueling the internal rift that has now propelled him to the top position, Sunak may leave tough financial choices to Jeremy Hunt, his successor as finance minister. But the prime minister still bears ultimate responsibility for the direction the government takes in dealing with the economy.
Hunt’s comments have so far torn up most of the Kwasi Quarting mini-budget, suggesting the new government has no room for tax cuts and may be preparing for more painful cuts to public spending. If Hunt makes good on the Conservatives’ 2019 election-winning pledge not to raise income tax, value-added tax or national insurance, the government will likely need to implement “disguise taxes,” which means tax increases for workers.
Sunak will find it difficult to blame his predecessors for the new financial pressure facing the UK. Kwarteng’s supporters are likely to constantly remind him – as ex-Prime Minister Liz Truss did on her way to winning him in the previous leadership contest – that tightening fiscal policy will only deepen the expected recession for the Bank of England and many independent analysts.
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