As Sunak pleads his case to the British, the economy drags it down

As Sunak pleads his case to the British, the economy drags it down

Prime Minister Rishi Sunak hopes to stay in power by selling himself as the repairer of a broken Britain. But with inflation still high, debt mounting and growth stalled, the economic crisis could prove disastrous for Mr. Sunak.

Mr Sunak’s challenges could become more formidable on Wednesday when Britain’s inflation rate for June is to be announced, which analysts say could stay above 8 per cent. That would put at risk one of the five goals Mr Sunak has set for his government: halving the inflation rate by the end of 2023.

For Mr Sunak, it will also be a frustrating time, a day before three by-elections – special elections to fill vacant seats in parliament – on Thursday which will be another test for his Conservative Party.

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 deep economic malaise, a quagmire of problems – some new, some long-standing – that are troubling Mr Sunak as he says his party, which has been in power for the last 13 years, is Is in, deserves to continue in the government. He will have to be called by January 2025, after the general election.

“They’re running out of runways,” said Tim Bell, professor of politics at Queen Mary University of London. “These by-elections are likely to be a referendum on the government, and they could lose all three.”

Former Chancellor of the Exchequer and hedge fund manager Mr. Sunak has earned a reputation as a technocrat and problem solver. He has rejected the supply-side 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 reinvigorate UK growth. In contrast, inflation is forcing the Bank of England to aggressively raise interest rates to prevent wage-price growth. Tight-money policy threatens to push the economy, which is already stagnant, into recession. And it is hurting millions of Britons who face rising rents and higher rates on their mortgages.

Economists agree that inflation is likely to fall significantly over the next six months, perhaps enough to meet Mr Sunak’s target of reducing the rate to 5.2 per cent by the end of the year. But Britain’s other problems – weak growth, low productivity, labor shortages, and the crumbling National Health Service – are unlikely to be fixed in time to claim full change before voters face it.

“Low productivity and low growth make economic policy challenging,” said Mahmood Pradhan, head of global macro economics at asset manager Amundi. “It reduces the fiscal space. It’s a very difficult straitjacket to live in.”

Due to the deteriorating public financial situation, Mr Sunak can neither spend heavily to raise wages for striking doctors or railway workers, nor can he offer tax cuts to voters. As things stand, it is already in danger of missing another one of its five pledges: reducing the national debt. government debt has increased more than 100 percent of GDP For the first time since 1961, As per latest data.

For two years, the government has frozen the income bracket for personal income taxes, raising effective rates instead of increasing with inflation. As a result, Mr. Sunak finds himself in a strange contradiction: a free-market conservative going to the polls with a government thatThis imposes the largest tax burden on voters since World War II.

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

“He has little to do with being directly linked to both Cameron-Osborne austerity and a Johnsonian hard Brexit,” said Jonathan Ports, professor of economics and public policy at King’s College London. “Many other senior Tories can claim that they didn’t really buy one or the other. Don’t listen.

This week’s by-elections to fill the three seats vacated by the Conservatives confirm Mr Sunak’s plight. One seat belonged to Mr Johnson, who resigned from parliament after a committee recommended he be suspended for misleading MPs about his attendance at parties during the coronavirus pandemic lockdown. The second was occupied by an aide of Mr Johnson, who also quit, and the third was occupied by a lawmaker who resigned following allegations of drug use and sexual misconduct.

While Mr Johnson’s dirty legacy and Conservative Party scandals will play a role in these races, analysts say the cost of living crisis will be a major theme. Professor Bell said some governments win elections when real wages are falling, as they are in the UK. In the latest polls, the opposition Labor Party is ahead of the Conservatives by almost 20 percentage points.

Fears of a widespread defeat have put Mr Sunak under pressure from Tory backbenchers to offer voters relief in the form of tax cuts or help paying off their mortgages. However, most analysts expect him to promise an income tax cut next spring, which will be postponed until after the election.

As Mr Sunak is keen to remind people, not all of Britain’s problems are unique or self-made. Like many other countries, it faced the long-lasting effects of supply disruptions, rising food prices, and rising energy prices following Russia’s invasion of Ukraine after the end of the pandemic-induced lockdown.

Yet Britain’s core inflation rate – which excludes volatile energy and food prices and is a gauge of domestic price pressures – remains significantly higher than in the United States and the eurozone.

“This suggests that these inflation dynamics have become more embedded than in other countries,” said Kristin Forbes, 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. ,

The UK, he said, had the misfortune of being hit by both energy growth like its neighbors in Europe and strong domestic inflationary pressures due to tight labor markets like the United States.

Professor Forbes said, “The UK was facing a more difficult challenge than other countries, in the sense that it was actually hit by a confluence of shocks that were bigger than the individual shocks that other countries suffered.”

But there are other problems which are uniquely British. Unlike most countries, there are still more people out of the labor force in the UK 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 job vacancies, salaries are increasing rapidly, which further drives up inflation.

Mr Sunak has offered to boost public sector wages by five per cent to seven per cent to end the strikes that have closed Britain’s schools and crippled the health service. But this has not yet pacified the labor unrest.

Surprising some economists, Britain has so far avoided recession. But its flexibility may be waning, as people cut back on spending to pay their rising mortgage bills. Around 4.5 million households have already faced a rate hike since the Bank of England started raising interest rates in December 2021. The remainder, another 4 million, will be hit with higher rates until the end of 2026.

Like other Western leaders, Mr Sunak’s fate may be largely out of his hands. Last month, the Bank of England, reeling from crippling inflation, unexpectedly raised interest rates by half a percentage point to five percent. Traders are betting that rates will reach six percent by the end of the year — a number that will mean higher financing costs for businesses and households and hurt economic growth even more.

“The more tightening we see, the risk of a recession increases,” said Mr. Pradhan, who serves as deputy director of the International Monetary Fund. “It won’t take long for the UK economy to go into recession.”

Source link

Leave a Comment

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

33 − = 24