Against the odds

It did not come as a surprise when Liz Truss defeated contender Rishi Sunak on Monday to emerge as leader of the Conservative party and UK’s new Prime Minister, but her challenge has just begun. Sunak began promisingly in the contest, but finally lost by a margin of over 20,000 votes in an election in which just 1.4 lakh party members participated. Sunak was regarded as a popular Chancellor of the Exchequer for having ramped up income support for the weak in Covid times, but perhaps earned the misgivings of the wealthy in his party for having raised corporate taxes in order to do so. Truss has promised to reverse Sunak’s taxes as a means to boost a stagflationary economy where consumption has been hit by double-digit inflation and April-June growth is just 0.1 per cent over the previous quarter. UK’s GDP is barely at pre-pandemic levels, with the prospect of zero growth in 2023. But Truss’ idea of cutting taxes does not seem convincing when inflation is up and away. Unless this is matched by a rollback in the Covid payouts, it could throw public finances out of gear, more so at a time of rising interest rates. Public debt to GDP ratio is at close to 100 per cent, against 80 per cent before the pandemic. The other option is to cap energy prices, as is reportedly being considered, but that too may have a deficit impact.

According to an IMF analysis, the average UK household will lose 8.3 per cent of its purchasing power in 2022 as a result of higher energy costs, with the poorer households suffering more. An erosion in real incomes has led to widespread labour unrest, which the new Prime Minister will be expected to address. It remains to be seen how Truss steers the economy out of a perfect storm of factors — rising input costs, the ravages of Covid, the Ukraine war, and perhaps most important of all, Brexit. She has about a 1,000 days to prove to the country that her party leadership’s espousal of Brexit (leading to higher trade and immigration barriers) was not a mistake. At present, there are enough indications to suggest that Brexit has held up UK’s recovery more than its developed country peers. The growth in immigrant population and foreign direct investment has fallen, post Brexit. Similarly, a recent study by Resolution Foundation and LSE observes that Brexit will “create a lasting impact on Britain’s competitiveness and productivity in the coming decade” as a result of reduced openness, even as its exports to the EU have not been hit as much as expected. The UK has lost market share in the US, Canada and Japan. The pound has done worse than other major currencies this year, not least because UK’s exports in the 12 months up to June 2022 were up 9 per cent, while imports rose 20 per cent, no doubt in the wake of the recent energy shock.

It is too early, however, to write off an OECD economy that has been a global superpower for three centuries. But it is clear that UK will be on the search for new trade and investment deals with economies such as India. It remains to be seen whether an “early harvest” FTA takes shape this year — a deal in which Truss had expressed considerable optimism in her capacity as foreign minister. India, which has a bilateral trade of $50 billion in goods and services, is well placed to negotiate a trade-investment deal.

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