With Indian-origin Rishi Sunak taking over the responsibility of the Prime Minister of the crisis-ridden United Kingdom (UK), all eyes are on how Rishi Sunak deals with this crisis. The British pound had hit an all-time low by September 26, 2022, at 1.076 per dollar, down by more than 27 per cent in the last few months. After that, though, it has improved by 6.5 per cent in the last one month, England’s foreign exchange reserves today are sufficient only for a few weeks’ worth of imports. On the one hand, the pound continues to weaken against the dollar, and it is becoming increasingly difficult for the Bank of England (the central bank) to stop the pound from falling further due to the depleted foreign exchange reserves. In 1976, when a pound was equal to two US dollars, and it was weakening, England tried to stop it by taking a loan of $ 3.9 billion from the International Monetary Fund. But now that pound is moving towards parity with the USD, the UK does not seem to have the ability to stop its further depreciation.
UK economy had recorded a decline of 0.3 per cent in GDP till August, while according to the estimates of the International Monetary Fund, GDP growth is expected to grow at a maximum of 0.3 per cent in 2023. GDP growth was 0.7 per cent in the first quarter of this year, which declined to 0.2 per cent in the second quarter, 0.1 per cent in July and further to negative 0.3 per cent in August. Inflation in the British economy reached 10.1 per cent last month, and fuel prices have risen up to three times as oil and gas supplies are disrupted due to the Ukraine war. Britons will be bound to face difficulties in the coming winters. It is understood that 30 per cent of the people of England have lost their savings and the government debt has also reached 95 per cent of GDP, which is a record. A Think Tank has warned that in the next 50 years, this government debt can go up to 320 per cent of GDP.
As soon as he was elected as the Prime Minister, Rishi Sunak said that his priority would be to solve the economic crisis. Regarding the decisions taken by former Prime Minister Liz Truss, he said that mistakes have been made in the past, though intentions cannot be doubted. He said that he has been chosen to solve these problems. He also said that he will run the government with integrity, professionalism and accountability.
It is worth noting that former Prime Minister Liz Truss had taken some decisions to reduce the tax rates and increase government expenditure, supposedly to providing relief to the common people, due to which the government was all set to make further borrowing. This caused a significant dent to the credit worthiness of the government. As of September 26, 2022, the yield on the 30-year bonds had risen to 4.95 per cent. However, it has come down to 3.75 per cent in the last month. Due to this, there was an apprehension of an increase in the cost of government borrowing in future. After the resignation of the former Prime Minister, amidst a contracting economy, rising inflation and deteriorating revenues, a big responsibility has come on Rishi Sunak’s shoulders to take the UK out of this crisis. Though the situation will be clearer on November 17, when Rishi Sunak announces his economic policies, it will be interesting to understand the options available to Rishi Sunak in this regard.
Liz Truss presented a plan to give huge concessions in government taxes to give relief to the people from inflation in her budget. She said that this will give impetus to economic development, and people will get relief from inflation. It was a tax cut of 45 billion pounds. In such a situation, the market forces did not approve the move, which led to turbulences in the market and a recession. Even then, Rishi Sunak warned Liz Truss to curb spending and avoid tax cuts. Rishi Sunak says that it is not right to take the borrowing route to get out of inflation. Conservative Party MPs, who had earlier decided to hand over power to Liz Truss than to Rishi Sunak, the same MPs have now handed over the rein of power to Rishi Sunak.
Due to hurriedly cut taxes amid rising inflation, necessitating huge government borrowing, the market downgraded the government’s creditworthiness, and the bond prices plummeted. This meant that if the government borrows more to meet its expenses, it will get it at a much higher rate of interest, due to which the interest liability of the government in future may be much higher than before. It is worth mentioning that such an erosion in the government’s creditworthiness had probably never been experienced in the UK.
The government debt and the economy’s recovery have also become difficult due to rising interest rates. On the other hand, the general public is already struggling with declining purchasing power due to rising prices. Rising fuel and food prices have already spoiled the budget of the middle class. In such a situation, the recovery by mortgage companies is also endangered. This can also affect the health of banks and financial institutions.
On one hand, Rishi Sunak has to handle the British economy, while on the other he has to maintain public support for his ‘Conservative Party’ in view of the rising popularity of the ‘Labor Party’. He believes that China has trapped many developing countries in the debt trap
Significantly, Sunak, a strong opponent of the policy of reducing taxes, increasing expenditure and borrowing, believes that it is not in accordance with ‘conservative’ principles and it is actually socialism. Sunak plans to reduce the basic tax from the current 20 paise per pound to 16 paise per pound (20 per cent reduction), reduce Income tax by 1 per cent upto 2024, domestic fuel bill be cut and corporate tax be increased by 2023.
Regarding Russia, Sunak believes that British companies should reduce investment in Russia and intends to tighten sanctions on Russia further. Regarding China, Sunak believes that China is the biggest threat to global and UK security. He believes that China has trapped many developing countries in the debt trap through the Belt Road scheme. He also believes that China is also guilty of stealing UK technology.
Sunak’s plan looks better than Liz Truss’s policies in terms of market acceptability. It remains to be seen how he turns his plans into reality. But there is no doubt that the time ahead for Sunak is not smooth. On the one hand, he has to handle the British economy, and on the other hand, he has to maintain public support for his ‘Conservative Party’ in view of the rising popularity of the ‘Labor Party’. The future will tell how he handles the economic and political fronts simultaneously.
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