Economic Crisis Looms as UK Awaits New PM

Strategic Insights -

As the UK waits for the new Prime Minister, Liz Truss or Rishi Sunak, to take office on September 5, the country is already facing a daunting economic crisis. The cost of living is a major issue, with inflation and soaring energy bills causing a crushing squeeze on household incomes. The new PM will have to tackle the economic crisis, which includes expanding direct support for the most vulnerable, a decision which economists say will require billions of pounds in extra borrowing. The challenge is further complicated by potential conflicts with the Bank of England, the EU, and the need to make big fiscal and policy decisions.

Key Takeaways:

  • The new PM will face a daunting in-tray, including the cost of living crisis, energy bills, and potential conflicts with the Bank of England and the EU.
  • The cost of living is a major issue, with inflation and soaring energy bills causing a crushing squeeze on household incomes.
  • The new PM will have to expand direct support for the most vulnerable, a decision which economists say will require billions of pounds in extra borrowing.
  • Nadhim Zahawi, the chancellor, is drawing up a list of options to tackle the economic crisis, including going beyond the £5b windfall tax on oil and gas producers.
  • Truss opposes windfall taxes, as does Kwasi Kwarteng, business secretary and potential new chancellor, but the political pressure to impose heavier windfall levies will be huge.
  • The new PM will have to navigate a row with Andrew Bailey, the Bank of England governor, who is resisting changes to the bank's mandate and regulatory independence.
  • Both Truss and Sunak have promised to "keep Brexit safe" and review all retained EU law within 100 days, but this could lead to friction at the border and a trade war with the EU.
  • The new PM will have to allow Overseas Aid spending to exceed the "temporary" 0.5 per cent of GDP cap, a decision which could alienate "soft" Tory voters.
  • The Online Safety bill is another complex dilemma facing the new PM, with Truss and Sunak both expressing concerns about the legislation's impact on free speech.

Statistics:

  • Energy bills are set to rise to £4,000 a year or more.
  • Sunak has accepted the need to expand direct support for the most vulnerable by billions of pounds.
  • The windfall tax on oil and gas producers is £5b.
  • Truss has promised an emergency Budget in September with tax cuts, which would reverse Sunak's 1.25 percentage point national insurance increase, but this would only offer £59 to someone on the national minimum wage.
  • The Bank of England has raised interest rates to combat inflation.
  • The UK's Overseas Aid programme has been blocked for new payments, with a temporary 0.5 per cent of GDP cap in place.
  • The Online Safety bill aims to crack down on "legal but harmful" material online.

Sources:

  • "Boris Johnson briefly chaired a crisis meeting with energy companies yesterday as a riposte to claims that he is leading a 'zombie government'" (The Times)
  • "Cost of living By far the biggest immediate problem is how to ease the crushing squeeze on household incomes caused by inflation and the apparently inexorable rise of domestic energy bills to £4,000 a year or more." (The Times)
  • "Truss said this week she would do 'all she can' to help the most vulnerable: it would be a big early test of her priorities." (The Times)
  • "A 1 per cent rise in gas prices could cost households an average of £35 a month more..." (The Times)
  • "The BoE governor, Andrew Bailey, has insisted on regulatory independence, arguing that political interference could undermine investor confidence and make the City of London less competitive." (The Times)
  • "Both Truss and Sunak want to give ministers the power to review decisions by regulators 'in the public interest'..." (The Times)
  • "The Northern Ireland protocol bill, which would rip up part of Johnson's Brexit deal, is a key point of contention..." (The Times)