Winston Churchill observed that Britain’s Conservative Party’s greatest fault was “a yearning for mediocrity.” Churchill’s view may have been validated over the past few weeks. On September 5, Conservative Party members elected Liz Truss prime minister replacing the scandal-plagued Boris Johnson. Truss resigned 44 days later making her term the shortest in the nation’s history. This resulted in yet another new prime minister for the United Kingdom — its fifth in six years. This extraordinary series of events culminated with the announcement of a new government’s fall budget on November 17, which raises serious questions about the U.S.’s closest ally at a moment of numerous global challenges.
Wilting faster than a head of lettuce….
Truss’s political challenges began two days after she assumed office. Queen Elizabeth’s death brought global attention to the newly elected leader and the Prime Minster quickly donned the cap of “mourner in chief” for a grieving nation. Some experts argue this deprived her of even a brief “honeymoon” as an incoming leader. The political challenges mounted.On September 23, her Chancellor of the Exchequer, Kwasi Kwarteng, announced the government’s proposed “mini-budget” that he and Truss had crafted. The contents shocked her own members of Parliament, as Kwarteng was forced to defend that the dramatic cuts in taxes he proposed would quickly accelerate the country’s growth rate from 1.5 to 2.5 percent annually.
Unsurprisingly, Kwarteng’s package of tax cuts of 45 billion pounds for wealthy individuals and big corporations, along with bonuses for City of London bankers, proved controversial and politically unpopular. Financial markets shuddered. The overall cost would have resulted in a dramatic increase in government debt, as it was in addition to 60 billion pounds in state subsidies to cap energy prices. The Chancellor’s proposals defied the basic laws of economics in terms of cutting revenue while not reducing the budget. This would have inevitably resulted in higher levels of inflation that already approached 10 percent. Facing financial implosion Truss “threw her chancellor under the bus” and reversed course. But this did not help the market and currency disruptions as the British pound plummeted. To make matters worse her Home Secretary was fired or resigned (unclear) and wrote a scathing letter criticizing the Truss government. As calls for Prime Minister to resign mounted, a British tabloid had bookies betting on whether she would politically wilt faster than a head of lettuce and placed one on a live camera to monitor progress. Ultimately, she lost control of both the party and the government. Facing the likelihood of a parliamentary vote of no confidence, Truss stepped down and the lettuce won the contest.
Rishi to the rescue…
After a brief interlude, the Conservative Party elected Rishi Sunak as her replacement. Sunak had served as Chancellor of the Exchequer under former Prime Minister Boris Johnson, and it is rumored he called Sunak the “assassin” for resigning as scandals involving Johnson mounted. Johnson appeared poised to challenge Sunak initially, but he mercifully dropped out of the race. That allowed Sunak to be elected virtually unopposed. Sunak, 42, is of Indian descent — making him the country’s first non-white prime minister— and a practicing Hindu. He is reported to be richer than the king and the youngest Prime Minister since 1783. His wife is the daughter of an Indian billionaire, and their combined wealth exceeds $860 million. They own a $7 million home in Santa Monica, and Sunak held an American green card for many years while working for Goldman Sachs. He arrived at Downing Street promising a government of “integrity, professionalism, and accountability.” Sunak said he would govern as a “Thatcherite,” which implies cutting social spending, but circumstances may inhibit that desire and make it unlikely. The British people face the biggest drop in disposable income in UK history, and they are still reeling from the pandemic.
Sunak’s immediate task was dealing with the financial crisis: How his policies would affect both spending, as well as taxes, remained the major question. The government had provided massive price support for rising energy, and it was expected that more would be required as winter approached. Inflation was rising, which caused home mortgages to increase (in the UK mortgage interest rates are mostly short-term or variable), and those living on pensions faced a greater economic squeeze. Some economists estimated he needed to fill a “$50 billion hole” in the budget that was scheduled to be announced on November 17th.
In essence, Sunak needed to reestablish the credibility of the British government in the eyes of its people as well as the wider global community. The young prime minister was very busy during his first weeks in office. He participated in the global climate change conference in Egypt and the G20 meeting in Bali. He returned to London shortly before the “Autumn Budget Statement” was to be delivered to Parliament. By this time, inflation had reached 11.5 percent (the highest in over 40 years), a recession had been officially proclaimed, and many local communities were reported to be facing bankruptcy.
The nation was riveted on November 17 when Sunak’s Chancellor of the Exchequer, Jeremy Hunt, delivered the revised budget. Hunt announced 55 billion pounds in tax increases and budget cuts. He argued that while the “government cannot do everything” his proposals would make the recession shallower and shorter while bringing down inflation. The proposed budget did contain some efforts to cushion the blow on the most vulnerable. The top rate for income tax was lowered while pensions were increased by 10 percent, and the average energy bill will increase by five hundred pounds per year. In a surprise, funding for schools and the National Health Service was increased.
In summary, many experts argue the new government’s revised budget will result in the highest level of taxation Britain has experienced since World War II and a record fall in living standards. Corresponding budget cuts were postponed until after the next election. From Truss to Sunak, in just 55 days the Tory party made a $100 billion shift in tax cuts and subsidies.
Conclusion
Sunak’s victory and the “Autumn statement” have soothed the financial markets and provided what some describe as “the dullness dividend” — lower long-term borrowing costs and a reduction in political chaos. But the new prime minister must now seek to gain control over his party, which has sunk into bitter infighting following successive leadership crises. Sunak can unite them, but unity comes at a price. He clearly does not have a political mandate, and many experts argue the Conservatives lack credibility in the eyes of the population. The party’s political prospects are bleak. Sunak is the third prime minister in a few months, and the Conservative government he leads was elected in 2019. In 2022 alone there were 54 changes in ministers — twice as many as in any other year. This upheaval has made it very hard for any government to deliver policy and continuity. The Tory Party has less than a 10 percent approval rating in public opinion polls and trails Labour by 30 points. Elections are not scheduled until 2024 but considering the ongoing political turmoil and the Tories’ flagging popular support, the Labour Party leadership is pressing for early elections.
Long term, the United Kingdom continues to suffer from the economic and political effects of “Brexit. This remains a major issue and will continue for years to come, as promised economic benefits have not appeared. Polls now suggest that over fifty percent of the British population believes Brexit was a mistake. Sunak was a “Brexit” supporter even though the leader of his party during the referendum, Prime Minister David Cameron, supported remaining.
Liz Truss quoted the Roman philosopher Seneca when announcing her resignation. “It is not because things are difficult that we do not dare, it is because we do not dare that they are difficult”. While this may be true, in her case she dared and as a result made things more difficult for the British people. The Sunak government faces a difficult winter with plummeting living standards, extended waiting for health care, rising crime, and now tax hikes. It remains to be seen whether Rishi Sunak can lead the United Kingdom out of this crisis.
