Prime Minister Rishi Sunak hopes to stay in power by selling himself as the repairman of a broken Britain. But with inflation still high, debt soaring and growth sputtering to a halt, economic woes could prove to be Mr. Sunak’s downfall.
Mr Sunak’s challenges could become tougher on Wednesday when the UK inflation rate for June is released, with analysts saying it could remain above 8%. That would jeopardize one of the five goals Mr Sunak had set for his government: to halve inflation by the end of 2023.
It would also be dismal timing for Mr Sunak, a day ahead of three by-elections – special elections to fill vacant seats in parliament – on Thursday that will prove another test for his Conservative Party.
Britain’s annual inflation rate is higher than that of its European neighbors and twice that of the United States. It has become a symbol of the country’s deepening economic malaise, a quagmire of problems – some new, some longstanding – that plague Mr. Sunak as he claims his party, in power for 13 years, deserves to stay in government. following a general election he must call by January 2025.
“They’re running out of runways,” said Tim Bale, a professor of politics at Queen Mary University in London. “These midterm elections are likely to be a referendum on government, and they could lose all three.”
Mr. Sunak, a former Treasury Secretary and hedge fund manager, has built a reputation as a technocrat and problem solver. He has shed the supply-side ideological experimentation of his predecessor, Liz Truss, and the have-your-cake-and-eat-it style of her predecessor, Boris Johnson.
But Mr Sunak’s return to fiscal prudence has not yet revived Britain’s growth. Rather, inflation is forcing the Bank of England to aggressively raise interest rates to stave off a wage-price spiral. The tightness policy threatens to push the already stagnant economy into recession. And it hurts millions of Brits who are dealing with skyrocketing rents and higher rates on their mortgages.
The economists agree that inflation is likely to fall significantly over the next six months, perhaps enough to meet Sunak’s goal of lowering inflation to 5.2 percent by the end of the year. But Britain’s other problems – anemic growth, low productivity, labor shortages and a crumbling National Health Service – are unlikely to be resolved in time for him to claim a full turnaround before meeting the electorate.
“Low productivity and low growth make economic policy challenging,” said Mahmood Pradhan, head of global macroeconomics at Amundi, an asset manager. “It reduces the fiscal space. It is a very tight straitjacket to be in.”
With government finances deteriorating, Mr. Sunak cannot spend a lot of money to raise the wages of striking doctors or railway workers, nor can he offer tax cuts to voters. As things stand, he is already at risk of missing another one of his five commitments: reducing the national debt. Public debt has risen to more than 100 percent of gross domestic product for the first time since 1961, according to the latest data.
For two years, the government has frozen income brackets for personal income tax rather than raising them in line with inflation, raising effective rates. As a result, Mr. Sunak finds himself in an awkward paradox: A free-market conservative faces elections with a government that imposes the highest tax burden on voters since World War II.
Critics argue that he has no one to blame but himself. Mr Sunak supported the fiscal cuts introduced by the Conservative-led government of David Cameron and his chancellor, George Osborne, which hurt Britain’s productivity and eroded public services. And he favored Brexit, which hampered trade with the European Union, deterred investment and exacerbated labor shortages.
“He’s quite rare because he’s directly associated with both the Cameron-Osborne austerity and Johnson hard Brexit,” said Jonathan Portes, a professor of economics and public policy at Kings College London. “Many other senior Tories could make it plausible that they didn’t really believe in one or the other. Not Sunak.”
This week’s by-elections to fill three seats vacated by the Conservatives testify to Mr Sunak’s predicament. One seat belonged to Mr Johnson, who resigned from parliament after a committee recommended that he be suspended for misleading lawmakers about his presence at parties during the corona pandemic. Another was held by an ally of Mr Johnson, who also quit, and the third by a lawmaker who resigned after allegations of drug use and sexual misconduct.
While Mr Johnson’s tainted legacy and Conservative Party scandals will factor into these races, analysts say the cost-of-living crisis will be the dominant theme. Professor Bale noted that few governments win elections when real wages fall, as in Britain. In the latest polls, the opposition Labor Party leads the Conservatives by almost 20 percentage points.
The specter of a sweeping defeat has haunted Mr. Sunak has been pressured by Tory backbenchers to offer voters relief in the form of tax cuts or help paying their mortgages. However, most analysts expect him to promise an income tax cut next spring, which will be delayed until after the election.
As Mr Sunak likes to remind people, not all of Britain’s problems are unique or self-made. Like many other countries, it suffered supply bottlenecks after pandemic lockdowns ended, rising food prices and the lingering impact of rising energy prices after Russia invaded Ukraine.
Yet Britain’s core inflation – which rules out volatile energy and food prices and is a measure of domestic price pressures – has remained stubbornly high compared to the United States and the eurozone.
“That suggests that these inflation dynamics have become more entrenched than in other countries,” said Kristin Forbes, a professor of management and global economics at the Massachusetts Institute of Technology, and a former member of the Bank of England’s interest-setting committee. .
Britain, she said, was unlucky to be hit by both the energy spike, like its neighbors in Europe, and strong domestic inflationary pressures from a tight labor market, like the United States.
“The UK faced a more difficult challenge than the other countries in that it was really hit by a confluence of shocks that were bigger than the individual shocks that hit other countries,” Professor Forbes said.
But there are other issues that are quintessentially British. Unlike most countries, Britain still has more people out of work than before the pandemic. A majority say they are unable to work due to long-term illness, a problem exacerbated by the crisis in the NHS. With so many vacancies, wages are rising rapidly, further fueling inflation.
Mr Sunak has offered to raise public sector wages by five to seven per cent to end strikes that have closed Britain’s schools and paralyzed the health care system. But this has not yet put an end to the labor unrest.
Britain has so far avoided a recession, surprising some economists. But its resilience could burst as people cut spending to pay their rising mortgage bills. About 4.5 million households have already had to swallow interest rate hikes since the Bank of England started raising interest rates in December 2021. The rest, another 4 million, will face higher rates by the end of 2026.
As with other Western leaders, Mr. Sunak’s fortune may be largely out of his hands. Stung by the virulence of inflation, the Bank of England unexpectedly raised interest rates by half a percent to five percent last month. Traders are betting that interest rates will hit 6% by the end of the year – a figure that would mean higher borrowing costs for businesses and households and further hurt economic growth.
“The more tightening we see, the greater the risk of a recession,” said Mr Pradhan, who served as deputy director of the International Monetary Fund. “It doesn’t take much for the UK economy to slide into recession.”