Rishi Sunak faces huge task as Prime Minister

Rishi Sunak became Britain's third prime minister in two months on Tuesday, tasked with tackling a mounting economic crisis, a warring political party and a deeply divided country in one of the greatest challenges to confront any new leader.

The 42-year-old former hedge fund boss was asked to form a government by King Charles, and will seek to bring an end to the infighting and feuding at Westminster that has horrified investors and alarmed international allies.

Sunak, one of the richest men in parliament, will have to find deep spending cuts to plug an estimated 40 billion pound ($45 billion) hole in the public finances due to an economic slowdown, higher borrowing costs and a six-month program of support for people's energy bills.

With his party's popularity in freefall, Sunak will also face growing calls for an election if he moves too far from the policy manifesto that elected the Conservative Party in 2019, when then leader Boris Johnson pledged to invest heavily in the country.

Economists and investors have said Sunak's appointment will calm markets, but they warn that he has few easy options when millions are battling a cost of living crunch.

"With a recession in 2023 now increasingly likely, and the next general election in only two years' time, Rishi Sunak can expect a challenging premiership," Eiko Sievert at the Scope ratings agency told Reuters.

Sunak has warned his colleagues they face an "existential crisis" if they do not help to steer the country through the surging inflation and record energy bills that are forcing many households and businesses to cut back spending.

"We now need stability and unity, and I will make it my utmost priority to bring our party and our country together," he said as he was elected by his lawmakers on Monday.

Sunak, Britain's youngest prime minister for more than 200 years and its first leader of colour, replaced Liz Truss who resigned after 44 days following a "mini budget" that sparked turmoil in financial markets.

With debt interest costs rising and the outlook for the economy deteriorating, he will now need to review all spending, including on politically sensitive areas such as health, education, defence, welfare and pensions.

Reflecting the near constant state of turmoil in British politics this year, politicians, journalists and photographers once again crammed into Downing Street on Tuesday to hear a departing speech from Truss.

Speaking seven weeks to the day after she arrived as prime minister, Truss did not apologize for her short tenure and said she knew Britain was set for brighter days.

During her time in office the pound hit a record low against the dollar, borrowing costs and mortgage rates surged, and the Bank of England was forced to intervene to protect pension funds from collapsing.

Sunak will now start forming his cabinet, with some Conservative lawmakers hoping he will include politicians from all wings of the party.

He is expected to retain Jeremy Hunt as finance minister after the former foreign and health secretary helped calm volatile bond markets by ripping up most of Truss's economic program.

Investors will also want to know if Sunak still plans to publish a new budget alongside borrowing and growth forecasts on October 31, 2022 which would help inform the Bank of England's interest rate decision on November 03, 2022.

Sunak, a Goldman Sachs analyst who only entered parliament in 2015, must unite his party, aware that voters are increasingly angry over the antics at Westminster as the economy heads for recession.

He was blamed by many in the party when he quit as finance minister in the summer, triggering a wider rebellion that brought down Johnson.

While many expressed relief that the party settled on a new leader quickly, a sense of distrust remains among some while others questioned whether struggling families would relate, or ever vote, for a multimillionaire.

"I think this decision sinks us as a party for the next election," one Conservative lawmaker told Reuters on condition of anonymity.

Historian and political biographer Anthony Seldon told Reuters that Sunak would also be constrained by the mistakes of his predecessor.

"There is no leeway on him being anything other than extraordinarily conservative and cautious," he said.

Many politicians and officials abroad, having watched as a country once seen as a pillar of economic and political stability descended into brutal infighting, welcomed Sunak's appointment.

Sunak becomes Britain's first prime minister of Indian origin.

 

Can Liz Truss be another 'Iron Lady" of Britain?

According to Reuters, New British Prime Minister, Liz Truss faces a financial markets test. If she was planning big energy subsidies only, investors might not worry too much. But she plans tax cuts – and may pick a fight with the Bank of England (BoE) and trigger a trade war with the European Union (EU).

In many ways, Britain faces similar challenges to other European countries i.e. high inflation, rising interest rates, soaring energy prices and an imminent recession. Insofar as it stays in the pack, markets won’t single it out for special attention.

Britain faces extra risks. Inflation is particularly high, Brexit has damaged the economy and the country has a chronic current account deficit meaning it relies on foreign investors to pay its bills. Truss does not want to be part of any pack. She believes that bold supply-side reforms will launch the country onto a new higher-growth trajectory.

While that is not a bad ambition, she hasn’t presented a convincing strategy to deliver it. Rather, she looks like a populist prime minister who relishes confrontation.

According to media reports she is set to declare China a threat and has questioned Britain’s special relationship with the United States. She is also taking a hard line with the EU. She also wants to change the BoE’s mandate, which is to deliver price stability.

Up to now, Britain has been in the middle of the European herd on fiscal policy. Government debt was 100% of GDP at the end of the first quarter, not vastly above the EU’s 88%. Since last September Britain had allocated 1.6% of annual economic output to cushion consumers and businesses from the energy crisis, about the same as Germany and France, according to Bruegel, the Brussels-based think tank.

It’s still unclear what extra help Truss will give to support people with spiralling energy bills this winter. But it will be expensive. Just supporting households could top 50 billion pounds over the next year, or about 2% of GDP.

Helping businesses would require another mega-package. If gas prices stay high now that Russia has suspended some gas deliveries to Europe indefinitely, the government could face similar costs the following winter and beyond.

This bailout may end up being roughly in line with the rest of Europe. Germany announced a 65 billion euro energy package over the weekend.

The difference is that Truss will at the same time cut taxes on employment and reverse a planned rise in corporation tax, costing at least 30 billion pounds a year. And she does not seem to want to cut spending to compensate.

Truss is also dead set against funding her support package via windfall taxes on energy companies. This is a missed opportunity since the sector is set for excess profits of up to 170 billion pounds over the next two years, according to the Finance Ministry calculation.

High inflation might help the government by lowering the debt-to-GDP ratio. But this is not as much of a get-out-of-jail-free card as it is for some other countries, because a quarter of British government debt is linked to rising prices and just over a third has been bought by the BoE.

One area where Britain is already an outlier is that prices are rising faster than in other Group of Seven countries. Inflation jumped to 10.1% in July, and Citigroup analysts recently predicted it could reach 18.6% early next year.

As a result, the BoE will need to jack up interest rates sharply to re-establish price stability. It’s also minded to start selling government bonds later this month. These moves are unlikely to please Truss. Not only will they deepen the recession and hit her core voters; these will make it harder to fund a fiscal bonanza.

This could lead to further confrontation between Truss and the BoE. Although many investors agree that the central bank has been slow to nip inflation in the bud, the priority now is to bring prices under control. Financial markets will not appreciate anything that looks like tampering with the BoE’s independence.

Until recently investors viewed Britain part of the European pack. Both pound and the euro have fallen sharply against the US dollar this year – and government bond yields have been rising across the world. But there are now the first signs of jitters focused specifically on Britain. The yield spread between UK and German 10-year government bonds has widened by 0.3 percentage points in the past month. In the past 10 days, pond has fallen about 2% against the euro.

Who will be the next Prime Minister of Britain?

Members of Britain’s Conservative party will choose their next leader to succeed the ousted Boris Johnson as the next Prime Minister. Let us have a look at the two frontrunners.

The frontrunner in the leadership contest is current Foreign Secretary Liz Truss, 47, the daughter of a Labour-supporting maths professor and teacher who went to a state school but made it to Oxford where she took the course studied by many future prime ministers: philosophy, politics and economics (PPE). After a brief career as an accountant she became an MP in 2010 and rose steadily through the Tory ranks despite her past membership of the centrist Lib Dems. She campaigned in favour of remain in the fateful 2016 EU referendum campaign. But she made up for this by quickly becoming a hardline Brexiter and leveraging her loyalty to one Tory election hero – Boris Johnson – and by often being compared to another, Margaret Thatcher.

Rishi Sunak, 42, is the son of east African parents of Punjabi descent who moved to Britain in the 1960s. Their work as a GP and pharmacist enabled them to send their boy to one of Britain’s most expensive private schools, Winchester. He also went to Oxford and also studied PPE, before making millions in hedge funds and becoming a Tory MP in 2015. A Brexit supporter, he was soon picked out as a future leader and became Chancellor of the Exchequer soon after Johnson won his big election victory in February 2020. Also like Truss, he is married with two daughters.

A year ago, Sunak had the world at his feet, basking in the success of the Treasury’s Covid furlough scheme. But his reputation has waned – not helped by revelations about his billionaire wife’s tax status – and he went into the leadership fight being blamed for everything from the cost of living crisis to knifing Johnson in the back.

Truss, on the other hand, started from the back of the pack but the invasion of Ukraine gave her the platform to do her best Iron Lady impersonation with tough anti-Putin rhetoric. This delighted the Tory press and the older, middle-class men who largely make up the party members who are choosing the new PM. Once she made it into the final two to take on Sunak, she has never looked like losing.

The cost of living crisis, what the government should do about it and how that should be paid for has dominated. Truss launched her campaign with promises of big tax cuts and suggested her government could increase borrowing to pay for them.

Her plan to tell people what they want to hear – see this week’s ruling out of energy rationing – has left Sunak with no other choice than to stick to his orthodox stance that the country can’t afford tax cuts given the pandemic and the war in Ukraine. He hasn’t been able to make his accusations of fantasy economics stick, nor has he benefited from reminding everyone that his rival was a remainer. Truss has made the Ukraine issue her own, and has also profited from the press narrative that Johnson was shafted by the “Westminster elites”, for whom read “Sunak”.

As you might expect in British politics, class has played a big part and was unexpectedly overt when clips emerged of a young Sunak on a TV documentary joking about how he didn’t have any working-class friends. This played out while the professor’s daughter criticized her (actually very good) state school for failing working-class kids. Truss’s much less polished style has been marked but she has avoided any eccentric moments on a par with her infamous “blessed are the cheese makers” speech at party conference in 2014. Her potentially damaging failure to describe France as an ally was straight from the Johnson playbook and she also escaped too much damage from a leaked tape of her calling British workers lazy.

The longest leadership race in living memory will end when the winner is announced on Monday lunchtime British time, although despite the buildup it’s not much of a cliffhanger. Truss has had a huge lead in the polls throughout the contest, with the most recent roundup of surveys giving her 59% of the vote to Sunak’s 32%.

Victory will make her the third woman to lead Britain after Thatcher and Theresa May, all Conservatives. If Truss wins as expected, she – and Johnson – will then have to travel 500 miles to Balmoral on Tuesday for the traditional audience with the Queen who is unable to leave her Scottish redoubt because of an episodic mobility issue.