Rishi Sunak faces perfect storm made in UK

Bloomberg has published an article arguing that the UK prime minister must manage dire economic news and a precipitous slide in the opinion polls as a general election approaches. Caliber.Az reprints this article.

You can count on the Bank of England to always do the right thing — after it has tried everything else. The Old Lady of Threadneedle Street’s failure to nip rampant inflation in the bud in recent years has been followed by a belated, none-too-penitent course correction. On June 22, interest rates were hiked by 50 basis points to 5 per cent, the highest since 2008.

Until last summer, the BOE had been testing to destruction what a sceptical former governor, Mervyn King, calls the “King Canute Theory of Inflation” — as long as the public believed the Bank had inflation under control, then it would remain under control. The BoE’s forward guidance would tell the bond markets where interest rates would be in the future.

Last August, when inflation had climbed to 9.9 per cent, the BoE’s Monetary Policy committee forecast that inflation would return to its 2 per cent target within a couple of years. Monetary economists who had been predicting the worst were aghast. In March this year, the current governor, Andrew Bailey, signalled that interest rates had reached their peak at 4 per cent. It seems that the economic modellers had yet again misinformed the boss. 

Now Rishi Sunak’s government must live with a world of pain as deathbed measures to squeeze inflation out of the system threaten to plunge the country into recession. The prime minister can’t even scapegoat Bailey for fear of creating more uncertainty in the markets (although the usual unnamed Whitehall sources are prepared to do the job for him). When his predecessor, Liz Truss, turned on the UK’s fallible financial institutions, she was soon ejected from office. 

Besides, the PM earlier this year pledged to halve inflation, even though that’s the Bank’s job. The war in Ukraine and supply-chain bottlenecks abroad are no longer the issue. By now, the country’s inflation problem appears to be made in the UK — prices for domestically generated services are growing fast too. So the PM is left cajoling the supermarkets to pass on cost reductions, while his chancellor, Jeremy Hunt, begs the banks to show mercy to their heavily mortgaged creditors. 

With the country already facing the worst hit to living standards on record, UK core inflation rose this week to 7.1 per cent while headline inflation is stuck at 8.7 per cent, higher than in other G7 countries. The debt now exceeds national income for the first time since 1961. 

Halving inflation by the end of the year and cutting the debt were just two of the five pledges Sunak gave in January. His other promises are looking like stretch targets, too — waiting lists in the health service are at record highs and the return of good weather aids the small boats bringing more illegal migrants across the Channel from France. His fifth promise, to grow the economy, gets the thumbs up from the IMF, but that was before this week’s rate rise kicked in.

According to a poll conducted by Tory donor Michael Ashcroft, the Conservatives lead Labour on only national defence and security. The percentage of voters saying that the party shares their values is in the single digits — bad news for a prime minister whose wealth places him among the “private-jet rich.”

The next few months will be a real test of character and resilience for Sunak. He faces a perfect storm of dire economic news and a precipitous slide in the opinion polls as a general election approaches. Labour have extended their lead to 22 points. Talking to me at an al fresco party on the night of June 22, Sunak radiated an almost unnatural confidence under the circumstances — earlier that day he had been forced to talk down the prospect of tax cuts in the autumn. But at the same event, the shadow chancellor, Rachel Reeves, sounded equally confident that the Tories’ days are numbered. Other Conservative Cabinet ministers appeared to be trying out lines for a leadership bid in the event of defeat.

Sunak’s MPs clamour for something, anything, to be done to save their seats at the next election, likely to be called in autumn next year. Some of them with northern constituencies, in the so-called “Red Wall” of former Labour seats won in 2019, are calling for a whopping state bailout, this time for mortgage holders. They have been joined by “Blue Wall” Conservative MPs in the southeast and Midlands, their seats under threat from both Labour and the Liberal Democrats.  

Last year Tory MPs demanded and got support for families’ energy costs. Two years before, they cheered on the Covid furlough scheme that bailed out the country at a cost of 23 per cent of national income, a fiscal stimulus greater than any other G7 nation bar the US.

The party of limited government has acquired a nasty social democratic spending habit. This time around, however, Sunak is not giving way, for fear that his hard-won credibility with the markets will be shot. But doing the right thing could come at a high electoral price.

Hundreds of thousands of homeowners face mortgage revaluations next year. This is electoral poison. According to a Daily Telegraph investigation, the number affected is larger than the party’s majority in more than one-third of the seats it currently holds. Among those vulnerable is Chancellor Hunt.

The blizzard of dire economic news follows ructions in the Conservative party as Boris Johnson, Sunak’s predecessor but one, stormed out of Parliament. Johnson’s rage against No 10. and a House of Commons committee that condemned him for lying about No 10. parties during Covid competes for space in the media. The voters hate divided parties at the best of times, and these are some of the worst. Labour leader Keir Starmer has crushed all dissent in his party as the election approaches.

Not all is lost. According to the polls, Labour has not caught the public’s imagination. Many voters are still yet to make up their minds on whom to vote for. Sunak is rid of Johnson’s baleful presence in Parliament at last and his technocratic competence suits the times. But weathering the storm will not be enough. How can the prime minister convince the voters that after 13 years of troubled Tory government, it is still not time for a change?