The United Kingdom’s third prime minister this year has his work cut out for him. Food prices in the country surged by 11.6% in October, the economy is teetering on the brink of recession, and, after three years of Boris Johnson and barely six weeks of Liz Truss, the credibility of Britain’s government is on life support. In this Big Question, we ask Diane Coyle, Antara Haldar, Harold James, and Anatole Kaletsky whether Rishi Sunak is up to the challenge of leading the country. Featured in this Big Question
It might be hard to believe, looking at the absolute state of the UK government and the Conservative Party now, but there is broad agreement in Britain about the country's central economic problem. It is not the cost-of-living crisis. Nor is it the "moron risk premium" that some argue demands austerity. The problem is the absence of growth.
All of the advanced economies have experienced a slowdown in the trend rate of productivity and GDP growth since the mid-2000s, for reasons that are not well understood. But these trends are particularly powerful in the UK, where real incomes have essentially flatlined for over a decade. This limits any government's scope to tackle inflation or supply shocks.
Why is the UK in so much worse a position than comparable countries? Brexit is one obvious answer. Excessive centralization, including for tax and spending decisions, is another. There is little reason to hope that the Sunak government will tackle either problem effectively.
Any attempt to negotiate a saner trading relationship with the European Union would definitively split the Conservative Party, so Sunak will not risk it. Regarding the second, Sunak has spoken about economic "leveling up," and reappointed an energetic minister, Michael Gove, to spearhead the process. Yet there is no sign that he has any serious intention of devolving money and power to the sub-national levels of government where - at present - the only effective UK politicians are to be found.
I would love to celebrate Sunak's premiership. The son of immigrants, Sunak has charted a meteoric political rise from Member of Parliament to Chancellor of the Exchequer to Britain's first non-white prime minister. He climbed this ladder by stepping from one solid rung to the next. For example, the economic response to the pandemic that he led was innovative, bold, and largely effective; his flagship furlough scheme, for example, saved nine million jobs. And he rightly called out Trussonomics as bogus.
Compared to the libertine and libertarian who preceded him - both of whom I've written about for PS - Sunak looks good. But he confronts a grim economic reality, including double-digit inflation; a cost-of-living crisis (fueled by soaring food and, especially, energy costs), imminent strikes spurred by the drop in real income (including potentially at Amazon), and the looming threat of recession. And Sunak's likely approach to tackling these issues offers little to celebrate.
Personally, Sunak is a Finance Man - a former banker with a fortune of about $830 million. Politically, he is a committed Tory, whose appointed cabinet will surely help advance his promised "return to traditional Conservative economic values." It is these "Conservative values" that yielded a decade of austerity, which the United Nations criticized for "inflicting unnecessary misery." Both poverty (especially among children) and inequality rose as a result. And the Tories are the party that gave us Brexit, which is likely to reduce UK GDP by 4%, as it slows trade and, ironically, business investment.
While Sunak's selection as prime minister has temporarily calmed the markets somewhat and boosted public confidence, he does not have a popular mandate nationally (the overall sentiment currently leans Labour), and he had lost the Tory leadership race to Truss a mere two months ago. In other words, he will be skating on thin ice, as he confronts the challenge of choosing - or striking a balance - between spending cuts (backtracking on the approach that is the source of his popularity) and tax hikes (compromising on his Conservative values). On November 17, when the government releases its next fiscal statement, we will find out whether Sunak has chosen the People or the Party (and its flawed model of the Market). I suspect that whatever he does will be motivated first and foremost by his own political interests.
The swiftness of the process that brought Rishi Sunak into 10 Downing Street was for many a moment of relief, even celebration. Some even saw it as the beginning of the end for Brexit, though this is unlikely. While there may be compromises on the Northern Ireland question and the pace of undoing European legislation may slow, too much porcelain has been broken.
Viewed from the EU, the UK still looks unpredictable. There are big questions about migration and climate policy, both of which require cooperative solutions and are marked by intense divisions. More fundamentally, UK politics are now useful for Europe (and the rest of the world) primarily as an appalling and unappealing object lesson, proof that breaking with the institutional carapace that the EU provides creates serious difficulties. In very different ways, Britain and Russia have both made the case for further European institutional development much stronger.
Sunak knows that he has to be much more cautious. He and the stability-oriented finance minister, Jeremy Hunt, a holdover from his predecessor's cabinet, will avoid measures that will frighten the markets. That doesn't make policy easy. The November financial statement will be painful. Tax increases and spending cuts will depress the economy. Measures that should be considered to reduce spending - a revision of Liz Truss's excessive energy-support package and of overly generous pensions commitments - will provoke fierce pushback.
In the 2010s, the UK seemed to have plenty of good options. Today, everything is painful. This change is not limited to the UK, nor are its lessons. But a key lesson that Britain, in particular, must internalize is that pain is easier to bear in community. Tackling global ills requires exchange with other countries, including at the United Nations Climate Change Conference in Egypt, which Sunak initially said he would not attend (he has now changed his stance). Suffering on one's own - with no easy way out - is deeply dispiriting. As the UK is learning firsthand, it is also deeply divisive.
Will Sunak lead the UK out of crisis? The short answer is yes - not because Sunak seems set to fix the British economy's underlying problems, but because the "crisis" that felled Truss was largely a creation of the British media and bureaucratic establishment. Once Truss was ousted, markets stabilized, and the alleged "black hole" in Britain's public finances immediately shrank by half.
As a result, the "eye-wateringly tough" decisions expected from the Sunak government will probably prove to be mild. The main tax hikes and spending cuts supposedly required to stabilize public debt will be deferred until after the 2024 election, making them meaningless in practice. Yet bond markets will not protest, because Britain has one of the world's lowest government debt-to-GDP ratios - a fact strangely forgotten during last month's "debt crisis."
The bad news for Britain is that a deep recession - caused not by the UK's own fiscal crisis, but by the Ukraine war - is now certain, and any hope of mitigating it with a Keynesian stimulus has been dashed. But other countries considering a Keynesian response to wartime stagflation should not be discouraged by this experience, because government borrowing was not the real cause of Britain's fiasco.
The UK's manageable increase in public borrowing became a financial disaster only when Truss capriciously decided to start a bureaucratic war against Britain's three most important economic institutions - the Treasury, the Office of Budget Responsibility, and the Bank of England - whose support was essential to implement her economic plans. As a result, the Treasury and the BOE failed to coordinate their policies ahead of the government's budget announcements. The latter then permitted a longstanding lapse in pension-fund regulation to trigger three days of financial panic, waiting until after the government had abandoned its fiscal plans to implement measures to restore financial stability.
As Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis, noted, Britain's fiscal expansion "was thwarted not by the markets, but by a hole in financial regulation - a hole that the [BOE] proved strangely unwilling to plug." The lesson for other countries is not that fiscal stimulus is impossible or reckless; it is that governments and central banks must coordinate all economic policies properly in order to implement them intelligently.
From Project Syndicate
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