Prime Minister Rishi Sunak hopes to cling to power by selling himself as a fixer for a broken Britain. But with inflation still high, debt ballooning and growth stalling, economic woes may be Mr Sunak’s undoing.
Mr Sunak’s challenges could become more difficult on Wednesday when Britain’s inflation rate for June is released, which analysts say could remain above 8 per cent. This would jeopardize one of the five goals Mr Sunak has set for his government: halving the inflation rate by the end of 2023.
For Mr Sunak, the timing would also be bad, coming a day before three by-elections – a special election to fill vacancies in parliament – on Thursday that will spell another test for his conservative party.
The annual inflation rate in Britain 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 malaise, and the morass of problems – some new, others long-standing – that frustrate Mr Sunak as he claims his party, in power for 13 years, deserves to stay in government after a general election which he must call by January 2025. .
“The runway has run out,” said Tim Bell, professor of politics at Queen Mary University of London. This by-election is likely to be a referendum on the government, and they could lose all three.
Mr Sunak, a former Treasury secretary and hedge fund manager, has built up a reputation as a technocrat and problem-solver. He discarded the ideological, show-side experimentation of his predecessor, Liz Truss, and the ‘take cake and eat it’ style of her predecessor, Boris Johnson.
But Mr Sunak’s return to fiscal wisdom has not yet energized growth in Britain. On the contrary, inflation forces the Bank of England to raise interest rates aggressively to avoid a wage-price spiral. Tight money policy threatens to push the economy, already in recession, into recession. It is hurting the millions of Britons who face higher rents and higher rates on their mortgages.
Economists agree that inflation is likely to drop significantly in the next six months, possibly enough to meet Mr Sunak’s target of bringing the rate down to 5.2 per cent 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 resolved in time for him to demand a full conversion before he faces voters.
“Low productivity and low growth make economic policy difficult,” said Mehmood Pradhan, head of global macroeconomics at Amundi, an asset manager. “It reduces the fiscal space. It’s a very tight jacket to be in.”
With public finances in tatters, Mr Sunak cannot spend heavily on raising the wages of striking doctors or railway workers, nor can he offer tax cuts to voters. Right now, he’s already in danger of losing another of his five pledges: reducing the national debt. Government debt rose to more than 100 percent of the gross domestic product For the first time since 1961, According to the latest data.
For two years, the government froze income brackets for personal income taxes rather than increasing them with inflation, which drove up actual rates. As a result, Mr. Sunak finds himself in an awkward irony: a free-market conservative heading into an election with a governmentImposing the largest tax burden on voters since World War II.
Critics argue that he has no one to blame but himself. Mr Sunak has supported fiscal austerity for the Conservative-led government led by David Cameron and his chancellor, George Osborne, which has hurt Britain’s productivity and hollowed out its public services. He has advocated for Britain to leave the European Union, cutting off its trade with the European Union, sputtering investment and exacerbating labor shortages.
“It is very rare that it is directly linked to both Cameron Osborne’s austerity and Johnson’s hard Brexit,” said Jonathan Portes, professor of economics and public policy at King’s College London. Many other senior conservatives could reasonably claim that they didn’t really buy into one or the other. not sunak.
A by-election this week, to fill three vacant seats held by the Conservatives, testifies to Mr Sunak’s predicament. One seat belonged to Mr Johnson, who resigned from Parliament after a committee recommended he be suspended for misleading lawmakers about his attendance at parties during coronavirus lockdowns. The last Johnson ally to resign and the third were held by a lawmaker who resigned over allegations of drug use and sexual misconduct.
While Johnson’s dirty legacy and Tory scandals will play a role in these races, analysts say the cost-of-living crisis will be the dominant theme. Professor Bell noted that few governments win elections when, as in Britain, real wages have been eroded. In recent polls, the opposition Labor Party is leading the Conservative Party by nearly 20 percentage points.
The specter of a landslide defeat has put Mr Sunak under pressure from Tory MPs to offer voters relief in the form of tax cuts or help with their mortgages. However, most analysts expect him to promise to cut income taxes next spring, to be delayed 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 bottlenecks after the end of the pandemic lockdowns, from soaring food prices and the lingering impact of soaring energy prices after Russia’s invasion of Ukraine.
However, Britain’s core inflation rate – which excludes volatile energy and food prices and is a measure of domestic price pressures – has remained stubbornly high compared to the US and the eurozone.
“It suggests that these inflation dynamics are becoming more entrenched than in other countries,” said Christine Forbes, professor of management and global economics at MIT and a former member of the Bank of England’s rate-setting committee. .
She said Britain had the misfortune of rising energy prices, like its neighbors in Europe, and strong domestic inflationary pressures due to a tight labor market, like the United States.
“The UK was facing a more difficult challenge than other countries in the sense that it was really exposed to a combination of shocks that were greater than the individual shocks that hit other countries,” said Professor Forbes.
But there are other problems characteristic of Britain. Unlike most countries, there are still more people outside the workforce in Britain than before the pandemic. The 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, adding to inflation.
Mr Sunak has offered to raise public sector wages by five to seven per cent to end strikes that have closed British schools and crippled the health service. But this has not yet calmed labor unrest.
Britain has so far avoided a recession, to the surprise of some economists. But its resilience can crack, as people cut back on spending to pay mounting mortgage bills. Already, about 4.5 million households have had to swallow interest rate increases since the Bank of England started raising interest rates in December 2021. The rest, a further 4 million households, will be affected by higher rates by the end of 2026.
As with other Western leaders, Sunak’s fortunes may be largely out of his reach. Last month, the Bank of England, affected by the ferocity of inflation, unexpectedly raised interest rates by half a percent, to five percent. Traders are betting that rates will reach six percent by the end of the year – a figure that could mean higher financing costs for businesses and households and hurt economic growth further.
“The more tightening we see, the higher the risk of recession,” said Pradhan, who served as deputy managing director of the International Monetary Fund. “It wouldn’t take much to drive the UK economy into recession.”