The conservatives in power in ritania are having an unusual moment of sanity. By electing former Finance Minister Rishi Sunak to replace Liz Truss as the new head of state, the UK has replaced a discredited prime minister with one generally optimistic about financial markets. However, this only brought the aggrieved country out of its immediate crisis.
Pro-Brexit Sunak, 42, will become Britain’s first black leader as well as one of the youngest and richest. However, investors are more concerned about their familiarity with basic economic principles. Finally, during the last Tory leadership campaign just two months ago, Sunak carefully predicted that the untrust-funded tax cuts would send markets into a panic amid high inflation. After rising from 3.5% to 4.5% following a “mini-budget” in September, the UK 10-year bond yield fell to 4% last Friday after market turmoil forced Truss to resign. After Sunak fended off attempts to bring back wayward former Prime Minister Boris Johnson, the yield has dropped to 3.7%.
The Sunak trust has real value. With Truss, the UK will have to cut spending by £72 billion or increase taxes by the same amount to reduce its debt-to-GDP ratio by 2027, according to Government projections cited by the Sunday Times. Around £30bn of their £45bn in unfunded tax cuts have been reversed, leaving a smaller £40bn hole. But lower borrowing costs, accelerated by Sunak’s appointment, would reduce the gap to just £30bn, a UK budget expert told Breakingviews.
About half of that could come from Sunak reinstating the payroll tax hike he introduced himself before Truss reversed it. He could also try to use his investor confidence to delay further tax hikes without causing UK bond yields to rise again. But either way, Britons are faced with the unattractive prospect of seeing more tax hikes, investment cuts in critical infrastructure, or cuts to already strained public services.
This can be difficult in the long run. Tory MPs likely voted for Sunak for fear of losing his party’s reputation for economic prominence and his seat in the upcoming general election, scheduled for 2025. But far-right lawmakers dislike his reputation for raising taxes, and the Liberal Tories do not trust him for his support for Brexit, which has made trade with Britain more difficult. The UK, meanwhile, is facing long-term productivity problems and a cost of living crisis as energy bills soar. With the market honeymoon over, Sunak will fight to keep Parliament and the British people by his side.
AN ENERGY CRISIS IS AN EVERYTHING CRISIS https://t.co/9oJyEF0X1T
— Ed Conway (@EdConwaySky) October 24, 2022
