Rishi Sunak, the 42-year-old Prime minister of the United Kingdom has replaced the shortest-serving Prime minister in the history of the UK. Mr Sunak has previously served as the chancellor of the Exchequer, the title given to someone who oversees all economic and financial matters. During the 2020 pandemic it was Rishi’s idea to come up with the furlough scheme which is often accredited to preventing the collapse of the UK economy.
Where the previous prime minister failed to improve the economy and instead ruin it, high hopes are on the new prime minister to fix the economy and pave way for a brighter financial future. But can the ex-chancellor and ex Chief Secretary to the Treasury actually fulfil this miraculous feat?
Rishi Sunak took office last Tuesday with a pledge to fix the “mistakes” of predecessor Liz Truss and tackle a “profound economic crisis.” After witnessing the leader of the free world pronounce his name wrong and assign him an incorrect religion, he admits that difficult decisions will have to be made. The United Kingdom was already sliding towards a major economic recession when Liz Truss took office in September, as soaring energy bills ate into consumer spending.
Without the free flow of cash, an economy suffers, and recession occurs as the gross domestic product decreases. Now, Sunak has another headache: He must restore the government’s credibility with investors after Truss’ unfunded tax cuts sparked a bond market rebellion, forcing the Bank of England to intervene to prevent a financial meltdown.
This comes at a time when the cost of borrowing is constantly increasing, making mortgage rates and credit cards more expensive. Accomplishing this goal will require delivering a detailed plan to put public finances on a more sustainable path.
However, there is a severe problem?
The UK economy never really recovered after the great financial crisis of 2008. After years of austerity since this catastrophic event, government spending cuts becomes increasingly difficult to deliver. So whatever Mr. Sunak’s decisions are, failing to help households deal with surging living costs could prove politically devastating and further weigh in on the economy.
Current Chancellor Jeremy Hunt, who Rishi Sunak let keep the job, has started the ball rolling by reversing the £32 billion tax cuts that formed the bedrock of Truss’ failed plan to boost growth. Yet, the Hunt and Sunak duo will still need to find about £40 billion in savings to bring down public debt as a share of the economy in the next five years, according to calculations by the Institute for Fiscal Studies.
It is imperative that the trust of the investors is brought back, because without this, the growth of the economy lies in tatters. If investors do not buy into their plan and borrowing costs shoot up again, getting the situation under control would only become trickier, as interest payments on government debt rise.
One area Sunak may be tempted to tap is the social welfare budget. Questions have swirled about whether the Conservative government may try to avoid boosting state benefits in line with inflation, as is customary. This doesn’t help to know when Mr. Sunak is the wealthiest prime minister we have ever seen with an estimated net worth, twice that of Kind Charles the third. A more agreeable option, at least for the majority of households, would be extracting more taxes from large corporations such as those generating record-breaking profits amid the current doom and gloom of the economy.
Hunt has already confirmed that corporate taxes will rise from 19% to 25% next spring. In an interview with the BBC earlier this month, Hunt said he was “not against the principle” of windfall taxes and that “nothing is off the table.” A windfall tax is a one-off tax imposed by a government on a company. The idea is to target firms lucky enough to benefit from something they were not responsible for - in other words, a windfall.
Investors and economists expect that the government will announce a mixture of tax increases and spending cuts shortly. Hunt is due to reveal his plans in greater depth on Halloween day. No one wants to see a repeat of errors and horrors of the brief Truss era, when her gamble that unfunded tax cuts would jumpstart, growth backfired spectacularly. (unsurprisingly) If not handled correctly, The country could end up in a doom loop where every year you see more tax rises and more spending cuts, because you’ve there is no real growth So the cards have been dealt to Prime Minister Sunak, it’s not the best time to be a prime minister but also the worst time to make a mistake that could end up making the economy worse.
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