Rishi Sunak made headlines by becoming the first British Prime Minister of Asian origin. The newly elected leader of the Conservative Party won the Tory leadership contest, becoming the only successfully nominated candidate following Penny Mordaunt’s withdrawal. However, several challenges prevail in front of the PM. The nation continues to face a severe economic crisis aggravated by the disastrous policies put forward by Britain’s shortest-serving Prime Minister, the resigning Liz Truss. What will be Rishi Sunak’s stance on the resolution for the current obstacles to the British economy? And, will it repair Britain’s decreasing reputation on a global platform?
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The Ongoing British Economic Crisis
The United Kingdom is currently facing one of its biggest economic downturns led by a potent combination of global recession and interest rate hikes. The nation’s central bank is trying to limit and bring back inflation within single digits. Failure to restrict inflation will contribute to rising costs of essential commodities along with a decrease in actual income.
Britain’s youngest prime minister in 200 years has also been tasked with the additional burden of restoring the nation’s financial credibility on a global scale following Liz Truss’s unprecedented plans for unfunded tax reduction and an expensive energy price guarantee. The decisions have been met with widespread criticism both within and across borders, ultimately forcing the intervention of the Bank of England.
Growing borrowing costs did not help in balancing the budget deficit. Experts estimate the current scenario is likely to force the upcoming government to impose restrictions on government expenditure and raise taxes. The financial statement will be presented on 31st October. All of these come at a time when the entire European continent is reeling from the effects of the Russia-Ukraine war disrupting supply chains and raising energy and food prices.
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Key Challenges Crippling the British Economy
Rising Costs of Lending and Borrowing
The UK government’s expenditure for long-term borrowing has increased by more than 5% within mid-October. The figure was almost zero previously. This occurred despite the central bank’s best efforts to shore up demand and reduce bond yields. In addition, consumer borrowing expenditure has also grown significantly, eliminating hope of a post-pandemic recovery and subsequent investments.
Deteriorating Credit Rating
England is currently witnessing a regressing credit rating adding up to the associated risk premium placed by investors upon public debt. This subsequently increased operational expenditure. In simple terms, British consumers are less than likely to spend more and reverse the recession. Countless citizens are already facing survival challenges- facing uphill difficulty in meeting rising expenses for food, fuel, shelter, and mortgage. As an additional burden, most people are aware of the very likely possibility of energy costs catapulting again at the end of the current price cap during April 2023.
Rising Labor Shortages
Firms all over the UK are reporting widespread shortages in labor along with additional supply constraints. An interesting thing to note is that these supply and labor constraints are synonymous with an economic boom rather than a recession. Labor productivity across the UK remained almost stagnant for over a decade. Sunak had previously attempted to resolve this complication through reforms in prevailing labor-market discipline and deregulation. However, he left these issues unresolved during his tenure as a Chancellor.
Poor EU Relations
The growth in productivity picked up pace following England aligning the European Union towards its single-market completion starting in 1992. Sunak’s previous advocacy for quitting the European Union will come back to haunt him, posing a key obstacle in reuniting the Conservatives and calling out for rebuilding burnt bridges. EU’s cards have grown significantly following the Chinese economic slowdown dragging down growth across entire Asia, and an almost impossible challenge of securing a cross-Atlantic trade deal.
Sunak acknowledges that his ascent as the country’s PM coincides with one of the most severe economic crises Britain has ever experienced. During his previous tenure as the Finance Minister between February 2020-July and 2022, he introduced laws to impose the biggest tax burden on British citizens since 1950. His agenda also included a higher amount of public spending while introducing strict discipline and waste-cutting. Criticizing his predecessor’s decision on tax-cutting, Sunak declared that the tax-cutting would occur only after the successful completion of inflation. The plan is to reduce income taxes from 20% to 16% by 2029.
The newly-nominated British prime minister Rishi Sunak faces an uphill battle in combating the nation’s growing economic crisis. He has not exactly disclosed his exact intentions to run the country in regard to the ongoing economic and political crisis. Let us hope time progresses for the better.