April 23, 2024

As Sunak makes his case to the British, the Economy undermines him

Prime Minister Rishi Sunak hopes to hold on to power by selling himself as a fixer for a broken Britain. But with inflation still high, debt falling and growth slowing, economic woes could be undoing Mr Sunak.

Mr Sunak’s challenges could become more difficult on Wednesday when Britain’s inflation rate for June is announced, with analysts saying it could remain above 8 per cent. That would jeopardize one of the five goals Mr Sunak set for his government: halving the inflation rate by the end of 2023.

For Mr Sunak, it would also be awkward timing, coming a day before three by-elections – special elections to fill empty seats in Parliament – on Thursday that will put his Conservative Party to another test.

Britain’s annual inflation rate is higher than that of its European neighbors and twice that of the United States. It has come to symbolize the country’s deeper economic woes, a host of problems — some new, others long-standing — that have dogged Mr Sunak as he makes the case that his party, which in power for the past 13 years, deserved to stay in government. after a general election which he must call by January 2025.

“They’re running off the runway,” said Tim Bale, a professor of politics at Queen Mary University of London. “These by-elections will probably be a referendum on the government, and they could lose all three.”

Mr Sunak, a former chancellor of the Exchequer and hedge fund manager, has a reputation as a technocrat and problem solver. He ended the ideological experimentation of his predecessor, Liz Truss, and the have-your-cake-and-eat-it style of his predecessor, Boris Johnson.

But Mr Sunak’s return to fiscal prudence has yet to revive Britain’s growth. Conversely, inflation is forcing the Bank of England to raise interest rates sharply to avoid a wage-price spiral. The tight monetary policy threatens to push the already stagnant economy into recession. And it is hurting millions of Britons who are facing skyrocketing rents and higher mortgage rates.

Economists agree that inflation is likely to fall significantly over the next six months, perhaps even enough to meet Mr. Sunak’s goal of reducing the rate to 5.2 percent by the end of the year. But Britain’s other problems – anemic growth, low productivity, labor shortages, and a crumbling National Health Service – are unlikely to be fixed in time for him to demand a complete turnaround before he faces the voters.

“Low productivity and low growth make economic policy challenging,” said Mahmood Pradhan, global head of macroeconomics at asset manager Amundi. “It reduces fiscal space. It’s a very tight slim jacket.”

With public finances deteriorating, Mr Sunak cannot spend much money to raise wages for striking doctors or railway workers, nor can he offer tax cuts to voters. At this point, he is already in danger of missing another of his five promises: reducing the national debt. Government debt has risen to more than 100 percent of gross domestic product for the first time since 1961, according to the latest data.

For the past two years, the government has frozen the income brackets for personal income taxes rather than increasing them with inflation, driving up the effective rates. As a result, Mr. Sunak finds himself in an awkward paradox: A free-market conservative going into an election with a governmentt placing the largest tax burden on the electorate since World War II.

Critics argue that he has no one to blame but himself. Mr Sunak supported the fiscal austerity of the Conservative-led government of David Cameron and his chancellor, George Osborne, which hurt Britain’s productivity and hollowed out its public services. And he supported Brexit, which cut trade with the European Union, scared off investment and worsened its labor shortage.

“It is rarely directly linked to Cameron-Osborne austerity and Johnson’s hard Brexit,” said Jonathan Portes, professor of economics and public policy at Kings College London. “Many other senior Tories could plausibly argue that they didn’t buy into one or the other. Not Sunak.”

This week’s by-elections, for three seats left by the Conservatives, attest to Mr Sunak’s position. One seat belonged to Mr Johnson, who resigned from Parliament after a committee recommended he be suspended for misleading lawmakers over his attendance at parties during the coronavirus pandemic lockdowns. Another ally was Mr Johnson, who also resigned, and the third was a lawmaker who resigned following allegations of drug use and sexual misconduct.

While Mr Johnson’s tainted legacy and Conservative Party scandals will play a role in these races, analysts say the cost of living crisis will be the biggest theme. Few governments, Professor Bale noted, win elections when real wages are eroding, as in Britain. In the latest polls, the Labor Party leads the Conservatives by around 20 percentage points.

The crisis has left Mr Sunak under pressure from the Tory backbenches to offer relief to voters in the form of tax cuts or help to pay off their mortgages. Most analysts expect, however, for him to postpone his promise to reduce income taxes next spring, until after the election.

As Mr Sunak likes to remind people, not all of Britain’s problems are unique or self-inflicted. Like many other countries, it suffered from supply disruptions when a pandemic lockdown ended, from rising food prices and the continued impact of rising energy prices after Russia invaded Ukraine.

However Britain’s core inflation rate — which includes volatile energy and food prices and is a gauge of domestic price pressures — has remained persistently high compared with the United States and the eurozone.

“That suggests that these inflationary dynamics are more embedded than they are in other countries,” said Kristin Forbes, a professor of management and global economics at the Massachusetts Institute of Technology, and a former member of the Bank of England’s rate-setting committee. .

She said Britain was unlucky to be hit by the energy spike, like its neighbors in Europe, and strong domestic inflationary pressures due to a tight labor market, like the United States.

“The United Kingdom faced a more difficult challenge than the other countries, in the sense that it was really hit by a confluence of shocks that were greater than the individual shocks that hit other countries,” said Professor Forbes.

But other problems are uniquely British. Unlike most countries, Britain still has more people out of the workforce than before the pandemic. A majority say they cannot work because of long-term illnesses, a problem exacerbated by the crisis in the NHS With so many vacancies, wages are rising rapidly, fueling further inflation.

Mr Sunak has proposed a five to seven per cent rise in public sector pay to end strikes which have closed British schools and crippled the health service. But that has yet to end the labor unrest.

Britain has so far avoided a recession, surprising some economists. But its resilience could erode, as people cut back on spending to pay their rising mortgage bills. Already, around 4.5 million households have had to swallow rate increases since the Bank of England started raising interest rates in December 2021. The rest, another 4 million, will be affected by higher rates by the end of 2026.

As with other Western leaders, Mr. Sunak’s success may be largely out of his hands. Last month, the Bank of England, beset by the severity of inflation, unexpectedly raised interest rates by half a percent to five percent. Traders are betting that rates will hit six percent by the end of the year – a number that would mean higher funding costs for businesses and households and hurt economic growth even more.

“The sharper we see, the risk of a recession rises,” said Mr. Pradhan, who was deputy director of the International Monetary Fund. “It wouldn’t take much to push the UK economy into recession.”

Leave a Reply

Your email address will not be published. Required fields are marked *