Sunak’s boss will be the markets

After months of political theatre, Britain may have hit upon the right person in Rishi Sunak to lead it out of its economic mess. For Sunak, it has been a meteoric rise to prime ministership from the time he first became MP in 2015. Indian origin Sunak has been an accomplished professional in the world of finance and as chancellor under Boris Johnson, he did well to manage social distress through income transfers during the Covid period.He comes with a reputation of being level-headed -- after 45 days of farcical policies and reversals by his predecessor Liz Truss sunk the pound and sent interest rates into the stratosphere. Not surprisingly, he said on becoming PM that he “will place economic stability and confidence at the heart of this government agenda.”

Yet, there are “difficult decisions to come.” Britain needs to fix its gaping budget deficit (estimated to rise to 7-9 per cent of GDP or £200 billion in 2022-23) and get investors to plug its current account deficit (the CAD is likely to end 2022 at over 7 per cent of GDP), while ensuring that its people are not pushed to the brink by soaring energy and food prices. Unlike the Covid period, Sunak does not have the fiscal space to deal with war-induced turmoil. He will have to create that by raising taxes and cutting spending prudently – addressing concerns over declining public services. He has inherited a crown of thorns, but if he manages to pull Britain out of its macroeconomic mess he would be well-judged by history. Sunak’s political challenge lies in stemming the effects, real and perceived, of Brexit (which came into effect on January 2021) before his party goes to polls in January 2025 – it could be earlier if the slide is not arrested. Britain has fared worse than its OECD counterparts in weathering the effects of Covid and the Ukraine war. As regards FDI in financial services, a report by the City of London Corporation says: “Most markets saw a decline in investment during the pandemic, but the UK’s decline started prior to the initial outbreak of COVID-19.” UK’s status as a financial services hub is central to plugging its CAD.

The markets have played a key role in the political crisis by voting with their feet against the policies of Sunak’s predecessor, Liz Truss. Evidently, they also had a hand in deciding Truss’ successor; the swiftness with which Tory MPs rallied behind Sunak, an ex markets-man, tells a story by itself. Avoiding elections was obviously a major factor behind the decision to back a brown man but there was also possibly a nudge from the markets to MPs, pushing them towards Sunak. The rally in the bond markets and the softening of yields in the last few days is a good welcome to Sunak. But his challenge will be to balance the books without inflicting more pain on citizens. Sunak’s first test will come on November 17 when he announces the fiscal statement outlining his plan to fix government finances. His boss, the markets, will be watching.

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