Jit waits is almost over. The members of the Conservative Party have made their choice. This week, a new Prime Minister will be installed in Downing Street at the most trying time imaginable. Even February 1974, when Harold Wilson came to power and ended Britain’s three-day week, doesn’t quite fit the ever-present crisis Boris Johnson’s successor faces. It is arguably the darkest legacy since that of Winston Churchill in May 1940.
All the smart money is on Liz Truss winning the race, although in retrospect it can be seen as a Pyrrhic victory because the new Prime Minister will come to power with the economy about to collapse, the skyrocketing energy bills, the plummeting pound and the global financial markets sold out.
In more normal times, NHS waiting lists and the prospect of hospitals being overwhelmed by a winter flu outbreak or a new strain of Covid-19 would be the new government’s top priority. In the coming weeks, however, there should be one priority and one priority only – and that is avoiding economic collapse.
Throughout the seemingly endless Tory leadership campaign, Truss has radiated positivity, but the time for the booster is over. October’s spike in fuel bills is less than a month away and will significantly worsen the situation for households. Last week, the Resolution Foundation think tank said the impact of rising energy costs would reduce household purchasing power by 5% this year and a further 6% next year – together, the biggest decline in living standards in at least a century.
The prospect of massive impoverishment leads to a massive sale of the pound. While it’s true that currencies have generally fallen against the US dollar, the decline in sterling has been more pronounced than most. The pound ended last week around $1.15 against the dollar and looks set to fall further. More bad economic news – which is likely to be plentiful – could cause the pound to quickly head towards parity with the US currency. A falling pound adds to inflation by making imports more expensive.
International events also contribute to making life more difficult for the new Prime Minister. Veteran investor Jeremy Grantham said last week that the world was entering the final days of a super-bubble before a monster financial crash, made worse by deliberate attempts by the US Federal Reserve and other central banks to fight back. inflation.
“The current super-bubble presents an unprecedented mix of asset overvaluation (with bonds, housing and equities all critically overvalued and rapidly losing momentum), a commodity shock and an aggressive fed. Each cycle is different and unique – but each historical parallel suggests that the worst is yet to come.
Time will not be on the side of the new Prime Minister as the deadline for the next elections is just over two years away. It’s possible that the worst of a period of stagflation – a recession combined with rapidly rising prices – will be over by 2024, but it’s starting to look awfully tight. There is already speculation, left and right, that Truss could call a snap election on the grounds that the economy is rapidly heading south and needs a mandate to sort things out. In this regard, she faces the dilemma that Gordon Brown had in the fall of 2007, when the financial crisis was in its infancy: the situation is not great but can be as good as it was during some time. In contrast, politicians who have spent their entire careers rushing to the top find it hard to risk losing power quickly when there is no need to.
In truth, it doesn’t matter whether there are early elections or not, because the strategy should be the same in both cases. Truss’ premiership will likely be defined by decisions made during his first weeks in office.
The pretense that Britain’s problems can be easily solved must be abandoned. The cost of living crisis poses as serious a threat to the economy as the pandemic and it is time to put the country on an economic war footing.
In the spring of 2020, the government borrowed heavily to fund furlough and its various business support programs. Sunak, then chancellor, decided that keeping the economy afloat was more important than keeping the books balanced, and he was right to do so. Again, the government must spend fast and spend big, even if it means adding tens of billions of pounds to public borrowing,
Full use must be made of the emergency budget prepared by the Treasury for the new government. Officials take it for granted that Truss will insist on moving forward with his tax cut plans, but also assume that the new prime minister will want to provide more direct support to consumers and businesses. Truss and his new chancellor – who is expected to be current business secretary Kwasi Kwarteng – must choose carefully from the menu of options, mixing universal support with more targeted aid to the neediest households.
Not all the things that need to be done can be done quickly, so there will need to be a second round of announcements in a full budget later in the fall. This month’s mini budget is expected to give a hint of the likely direction of travel, such as a pledge to improve Britain’s woefully inadequate home insulation and boost energy security.
The blunt truth is that it is already too late to prevent a recession expected this winter. It’s not late, however, for Truss (or Sunak) to make sure he’s on the softer end of the spectrum.