As Sunak Makes His Case to Britons, the Economy Undermines It

Prime Minister Rishi Sunak hopes to stay in power by marketing himself as the repairer of broken Britain. But with inflation still high, debt ballooning and growth sluggish, the economic woes could return to Sunak.

Analysts said Britain’s June inflation could remain above 8%, making Sunak’s challenge even harder on Wednesday. That would jeopardize one of Sunak’s five goals for the government: to halve inflation by the end of 2023.

It’s also dire timing for Mr Sunak, with Thursday’s three by-elections (special elections to fill vacancies in parliament) the day after, a new test for his Conservative Party.

Britain’s annual inflation rate is higher than its European neighbors and double that of the United States. It has become emblematic of the country’s deep economic slump, quagmire of problems (some new, others long-standing), and the fact that I have been in power for the past 13 years. party has thwarted Sunak, who claims he deserves to stay in power. After a general election that must be convened by January 2025.

“The runway is running out,” said Tim Bale, professor of political science at Queen Mary University in London. “This by-election is likely to be a government referendum, and all three could be defeated.”

A former finance minister and hedge fund manager, Sunak has built a reputation as a technocrat and problem solver. He has abandoned the supply-side ideological experiments of his predecessor, Liz Truss, and the “have and eat the cake” style of his predecessor, Boris Johnson.

But even with Sunak’s restoration of fiscal health, UK growth has yet to revive. On the contrary, inflation is forcing the Bank of England to raise interest rates aggressively to avoid a spiral in wages and prices. Tight monetary policy threatens to push an already stagnant economy into recession. And it’s hurting millions of Britons who are facing soaring rents and rising mortgage rates.

Economists say inflation is likely to fall significantly over the next six months, possibly reaching levels high enough to meet Mr. Sunak’s target of cutting inflation to 5.2% by the end of the year. I agree that there is. But Britain’s other problems — poor growth, low productivity, labor shortages and a collapsing national health service — are resolved in time for him to argue for a complete turnaround before confronting voters. unlikely to be

“Low productivity and low growth make economic policy difficult,” said Mahmoud Pradhan, global macroeconomic head at asset manager Amundi. “It reduces fiscal space. It’s under very tight constraints.”

With his finances in trouble, Mr. Sunak cannot spend big to raise wages for striking doctors and railroad workers, nor can he propose tax cuts to voters. As things stand, he is already in danger of failing to deliver on another of his five promises: reducing the national debt.government debt increased Over 100% of Gross Domestic Product For the first time since 1961, according to the latest data.

For two years, the government has frozen the income brackets in the personal income tax, rather than raising them with inflation, and raised the effective tax rate. As a result, Mr. Sunak finds himself in a troubling paradox, with the free-market Conservatives running for election with the government.It imposes the heaviest tax burden on voters since World War II.

Critics argue that no one is to blame but him. Mr Sunak backed the austerity policies of the Conservative-led government of David Cameron and Prime Minister George Osborne, which have undermined productivity and hollowed out public services in Britain. And he defended a Brexit that would cut off trade with the EU, scare investment and exacerbate labor shortages.

“It’s pretty rare that he’s directly linked to both Cameron Osborne’s austerity and Johnson’s hard Brexit,” said Jonathan Portos, professor of economics and public policy at King’s College London. “Many other senior Conservatives might plausibly argue that they really weren’t for one side or the other. It’s not a snack.”

This week’s by-election, in which the Conservatives fill the three vacant seats, proves Sunak’s predicament. One seat was owned by Mr Johnson. Johnson resigned after a committee suspended him from office for misleading lawmakers about attending a party during the lockdown due to the coronavirus pandemic. Another was held by an ally of Mr Johnson, who also resigned, and a third by a lawmaker who resigned over allegations of drug use and sexual misconduct.

Mr Johnson’s tainted legacy and the Conservative scandal will affect these campaigns, but analysts expect the cost of living crisis to be a major theme. Professor Bale said few governments win elections when real wages are declining like Britain’s. A recent poll put the opposition Labor Party ahead of the Conservatives by nearly 20 points.

The prospect of a crushing defeat has put Mr Sunak under pressure from Conservative supporters to offer voters bailouts in the form of tax cuts and help paying their mortgages. But most analysts expect him to promise to delay next spring’s income tax cuts until after the election.

Sunak likes to remind people that not all of Britain’s problems are unique or of their own making. Like many other countries, even after the pandemic lockdown ends, the country is still suffering from supply bottlenecks, rising food prices and the impact of high energy prices following Russia’s invasion of Ukraine.

But the UK’s core inflation rate (which excludes volatile energy and food prices and is a measure of domestic price pressures) remains high compared to the US and the euro area.

“This suggests that these inflation dynamics are more deeply entrenched than in other countries,” said Christine Forbes, a professor of business and global economics at the Massachusetts Institute of Technology and a former member of the Bank of England’s Interest Rate Setting Committee. suggests,” he said. .

He said the UK has had the misfortune of being hit by both an energy surge, like its European neighbors, and strong domestic inflationary pressures from a tight labor market, like the US.

“The UK faced a tougher challenge than other countries in the sense that it was actually hit by a larger aggregate of shocks than the individual shocks that hit the rest of the world,” said Professor Forbes.

But there are other problems specific to the UK. Unlike most countries, the UK still has more people out of the workforce than before the pandemic. The majority say they are unable to work due to long-term illness, a problem exacerbated by the NHS crisis Job vacancies are so high that wages are rising rapidly, further fueling inflation .

Sunak has proposed a 5-7% pay hike in the public sector to end the strikes that have closed schools and crippled health services in the UK. However, labor unrest has not yet subsided.

The UK has so far avoided recession, surprising some economists. But that resilience could crack as people curtail spending to meet rising mortgage payments. Some 4.5 million households have already had to accept rate hikes since the Bank of England began raising them in December 2021. The remaining 4 million more households will be affected by rate hikes by the end of 2026.

Like other Western leaders, Mr. Sunak’s fate is likely to be out of his control. Last month, the Bank of England, plagued by a fury of inflation, unexpectedly raised interest rates by half a percentage point to 5%. Traders expect interest rates to reach 6% by the end of the year, a figure that means higher funding costs for businesses and households, further dampening economic growth.

“The more tightening, the greater the risk of a recession,” said Pradhan, a former deputy director of the International Monetary Fund. “It won’t take long to drive the UK economy into recession.”

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