No miracle solution for Sunak
Brexit ushered in a period of political instability in the UK. Over the past six years, as prime ministers came and went (David Cameron, Theresa May, Boris Johnson, Liz Truss and now Rishi Sunak), economic programs were on the back burner and foreign investors on edge, writes Gaurie Dwivedi.
Rishi Sunak, the UK’s fifth prime minister since 2016, has many firsts to his credit: he is the UK’s first Asian prime minister and the first Indian-born prime minister. But what remains to be seen is whether Britain’s youngest prime minister will become the first leader to halt the country’s biggest decline since the 1930s. A sea of economic challenges besets the UK, and the The task of addressing them is greater than many realize since the problems have been escalating for more than a decade.
Earlier this week, the Bank of England sounded the alarm when it warned that the UK was at risk of sliding into a prolonged recession. The UK’s central bank also warned that the economy was doing worse than the US and the euro zone. Significantly, after the Covid shock, all advanced economies have recovered and are now doing better than the UK. The British economy, meanwhile, is showing signs of collapsing under the weight of its systemic problems. The Bank of England has also warned that the UK’s recession could be its longest and that unemployment figures could double over the next two years.
For its part, the Bank of England, like other central banks around the world, is using the only tool in its arsenal: the tightening of monetary policy. But he has his own peril. When banks raise rates to control inflation, growth is negatively affected. The Bank of England, in an effort to contain record inflation, raised interest rates by the highest percentage since 1989. This aggressive increase brought the base rate to 3%. This is the highest level since the global financial crisis of 2008.
The rate hike will only add to Sunak’s problems as he tries to bolster confidence in his government, both among the British people and among global investors. The sharp rise in rates will hit the poorest 10% of households very hard, as this segment spends twice as much of its budget on utilities and food as the richest 10%. According to reports, for 8 million people who have fixed-rate mortgages, the increase in annual mortgage payments will be triggered once their existing loan agreements expire. On average, it will be up to 3000 pounds of additional salary. For more than 2 million households that have a variable rate mortgage, the blow will be immediate.
Every politician worth their salt knows that rising mortgages are unpleasant, especially in an economy battling record inflation and unemployment. And Chancellor Jeremy Hunt acknowledged the pain ahead when he said rising rates were “going to be very difficult for families with mortgages across the country”.
As Prime Minister Sunak and Chancellor Hunt work in their neighboring offices, they have roughly a fortnight to make a statement that will restore confidence in Britain’s economy. Or at least avoid a political implosion that will make global investors even less reluctant to invest in the UK economy. Sunak’s predecessor lost his job after investors began selling the pound against the dollar. Chancellor Hunt underscored this aspect of his job when he repeated: “The most important thing the UK Government can do at this time is to restore stability, put our public finances in order and get the debt down so that interest rate increases are kept as low as possible. possible.”
But rising interest rates will be just one of many grievances MPs will have to address when they return to their constituencies in the coming days. The economic situation of the average Briton is expected to get tougher.
The Prime Minister and his Minister of Finance (officially called Chancellor of the Exchequer) are preparing for tax increases and major cuts in public spending. These are the classic responses to international investors who worry about the UK’s growing debt and falling currency (making debt repayment more expensive). But for voters, these are moves that will deepen the recession and contract an economy that has been in a state of inertia and weak growth for more than a decade now.
Social cuts have become part of British politics and economics since 2010, when the era of austerity rushed in. During former Chancellor George Osborne’s tenure, excluding National Health Service, schools and aid spending; all government budgets have been cut. Public sector wages were also frozen and taxes increased. These measures were in line with the publicly declared commitment to reduce the high budget deficit of the United Kingdom, which was second only to America.
Three years later, despite the government coming close to achieving its fiscal consolidation target, these measures have put the UK economy on a path of consistent underperformance in productivity and real GDP. Long periods of low productivity suck demand out of the system, which in turn stifles investment. In 2015, UK productivity, measured by GDP per hour worked, lagged that of other G7 countries by 18 percentage points. The same year, David Cameron won a general election that was contested over a promise to cut government spending further. And of course the following year came Brexit, touted as the panacea to all the ills and worries of the British economy and its future. Except no.
Since 2016, political leaders in the UK have been in a state of Brexit-induced flux. And since many of its economic problems predate Brexit, they are now systemic and deep-seated. UK productivity growth since the 2008 financial crisis has lagged behind other advanced economies such as France, Germany and the US. This has resulted in lower median incomes in the UK than its neighbours. This scenario is likely to continue, at least into 2023, when the UK is expected to fare worse than all G20 countries except Russia. According to the Office of Budget Responsibility, which is the nodal body for government finance, Brexit would further reduce UK productivity and GDP by 4%. These official figures indicate that there is no magic bullet for Sunak, a keen Brexitter.
Brexiters like Johnson and Sunak had argued that leaving the EU would bring favorable trade deals to the UK. The UK has signed 71 trade agreements since leaving the EU’s Common Trading Platform. But these agreements are similar to previous agreements concluded within the framework of the EU. Consider this, UK GDP is estimated to grow by 0.08% by 2035 thanks to its trade pact with Australia. The UK has also signed trade pacts with Japan and New Zealand, but these are expected to yield similar results.
Brexit ushered in a period of political instability. Over the past six years, as prime ministers have come and gone (David Cameron, Theresa May, Boris Johnson, Liz Truss and now Rishi Sunak), economic programs have been put on the back burner and foreign investors on edge.
For Tories, however, stability means more cuts. It looks like the UK’s long-awaited infrastructure projects, like the HS2 high-speed rail line, which has been delayed for almost 15 years, could be one of those victims of the government’s upcoming tough economic calls for Sunak. As the cuts deepen, any hope of reviving investment will intensify. And as investment dries up, the prospect of a long-term change in the UK’s economic trajectory will also diminish.
Osborne’s austerity measures in 2010 came at a time when interest rates were at an all-time high. And with energy bills under control, the conservatives could force the relentless reduction of public budgets. In 2022, Jeremy Hunt has no such luxury; his austerity drive will have both economic and political ramifications. It may be a quick fix to soothe the frayed nerves of global investors, but it won’t be able to bring back growth.
With a general election two years away, Sunak must turn around the economy and the fortunes of the conservatives, who are facing record popularity figures.
Almost fifty years ago, the UK faced stagflation, a global energy crisis, a current account deficit and enormous social unrest. It had to be bailed out by the International Monetary Fund. It remains to be seen whether the UK can avoid a similar outcome now. As the long British winter sets in and the Ukraine crisis shows no signs of ending, the scenario doesn’t look very far-fetched.
All eyes will be on Hunt’s November 17 statement.
(Gaurie Dwivedi is a seasoned author and journalist. She is also a professor in the Department of International Relations at OP Jindal University.)