It was only a matter of time before Rishi Sunak made his first about-face. After only a week in office, the time had come: after heavy criticism, the new British prime minister is now flying to Egypt for the UN climate conference. Previously it had been said in Downing Street that Sunak did not have time for this because he had to take care of “urgent domestic political issues”. That was a fairly general description of the prime minister’s main job: cleaning up the mess left behind by his predecessor, Liz Truss, as quickly as possible.
He doesn’t have much time. According to Sunak, Chancellor of the Exchequer Jeremy Hunt is to present a plan on November 17 for how the clean-up work can be successful. Although the situation on the financial markets has eased since Truss’ resignation, the pressure on the British government is still enormous. Sunak, a former investment banker, is well aware of this. And so the goal is clear: London needs to save up to 50 billion pounds, which is the equivalent of 58 billion euros. According to government circles, the financial markets are unlikely to be satisfied with less.
If you will, Rishi Sunak is almost a prisoner of the so-called markets. Everything he does has to please them – otherwise he has a problem. He didn’t put himself in this position, it was the fault of his predecessor’s economic policy plans, which were not financed. Truss thus unleashed chaos on the financial markets, so great that the Bank of England had to intervene. Almost nothing is left of the Truss government’s plans, but Britain remains in the sights of the financial markets. “Sunak needs to be credible to the markets that he has brought stability back to Downing Street,” said a Westminster official.
The excess profit tax will probably rise from 25 to 30 percent
Stability means, above all, presenting a plan to plug the budget hole. And that’s exactly what Sunak and his Chancellor of the Exchequer, Hunt, are working on. Hunt is expected to explain exactly how the finances are expected to develop over the next five years during his appearance. It is clear that there will be tax increases and spending cuts. The only question is which one.
An increase in the tax on excess profits of oil and gas companies is considered very likely. Sunak, when he was Chancellor of the Exchequer, introduced a 25 percent tax. The tax is expected to increase to 30 percent. Actually, the so-called windfall tax expire at the end of 2025, but it is now likely to be extended to 2028. It is possible that electricity producers will also have to pay such a fee in the future.
Earlier this week, Hunt said everyone would have to pay more in taxes, especially those with “the broadest shoulders.” According to British media, the Chancellor of the Exchequer is likely to freeze certain income tax thresholds and allowances, meaning that millions of citizens are likely to be placed in a higher tax bracket.
Otherwise, large-scale spending cuts are pending. Not only are development aid under scrutiny, but also expensive infrastructure projects such as the controversial HS2 project, which was intended to provide faster train connections in northern England. Hunt has called on all departments in the government to present savings options. According to reports, the increase in defense spending planned by Truss is likely to be withdrawn again. Sunak’s predecessor wanted to exceed the NATO target of two percent of economic output, three percent were planned.
The head of the central bank warns of a “very challenging” economic slump
It is considered fairly certain that nothing should be saved, at least in the case of the NHS state health service. That would contradict the Tories’ election platform. The British healthcare system has long been considered a need for restructuring, and patients sometimes have to wait months for doctor’s appointments. The hope that this will change under the new government should have been dealt with in view of the austerity program. After all, it is said in Westminster, there should be no new wave of cuts in the NHS.
So where the money for plugging the budget hole will come from is still an open question. Noisy Financial Times Both Sunak and Hunt expect UK government bond yields to fall again in the future thanks to their austerity plan. If these are about 0.7 percentage points lower than when Truss’ tax plans were announced, that would reduce the interest burden on the government debt service by £10 billion a year alone.
But it’s not that far yet. Sunak and Hunt have some convincing to do first. Some Tories are still struggling with the fact that a Conservative government is now almost certain to raise taxes. Many see this as a contradiction to the liberal attitude of their party. And yet they will probably not be able to avoid acknowledging reality. And she doesn’t look very nice.
On Thursday, Bank of England Governor Andrew Bailey painted a rather bleak picture. In his view, Britain is facing a “very challenging” slump in economic output that is likely to last for two years. On balance, the Bank of England expects a decline of 2.9 percent during this period. Noisy Times this would be the longest recession since the First World War. According to the central bank, unemployment is also likely to almost double in the next two years.
The economic situation is already tense. The inflation rate is 10.1 percent, and poor people in particular are finding it difficult to pay for their living expenses. To get inflation under control, the Bank of England raised interest rates by 0.75 percentage points to three percent on Thursday. Analysts had expected this increase.
The decision to raise interest rates for the eighth consecutive time was not unanimous. In the nine-member monetary policy committee, the Monetary Policy Committee, seven members voted for the increase to three percent. One representative voted for a rate hike of 0.25 percentage points, another for 0.50 percentage points.
After the announcement of the new key interest rate, the yield on ten-year British government bonds rose. Which in turn means that the state has to pay more to service the debt. No good prospects for Sunak.