Asees Bajaj considers the multitude of challenges that lie ahead for the UK’s new prime minister amid
the country’s economic decline, growing political divisions, and mounting socio-economic challenges.
The UK has seen considerable leadership uncertainty since its controversial referendum to leave the EU in 2016. This year alone, the UK has had three prime ministers from the Conservative Party, signalling growing party divisions amid widespread dissatisfaction among the electorate.
Most recently on 25 October, following Prime Minister Liz Truss’s resignation after a short 45-day tenure, the Conservative Party’s leadership appointed Rishi Sunak to replace her as party head and prime minister. Sunak’s appointment to the top job is consequential, not because of his South Asian ethnicity, but due to the two-fold mandate his administration is faced with: to restore economic stability to the UK against challenging external economic conditions, and to repair the UK electorate’s wavering trust in the divided Conservative Party. Given the government’s limited ability to inject sizeable and sustainable fiscal stimulus into the economy (not helped by Truss’s ill-advised tax cuts), and the government’s difficulties in managing the UK’s exit from the EU, Sunak has his work cut out for him.
Weathering recessionary risks
Sunak’s appointment has helped calm financial markets and some of the worries investors had about the UK’s creditworthiness following the announcement of unfunded tax cuts by the Truss administration on 23 September. However, economic challenges for the UK remain considerable. Growth has been held back by investment shortfalls since the country’s departure from the EU. Government spending needs to be lowered as the fiscal deficit has widened unsustainably following substantial government spending aimed at stimulating the UK economy. Further, at around 10 percent, inflation in the UK is currently higher than in most developed countries and is undermining the UK’s economic prospects as both household purchasing power and corporate profit margins are being eroded.
To tame inflation and help plug the UK’s fiscal deficit, the government and the Bank of England are tightening financial conditions through tax increases, cuts to government spending and interest rate hikes. Similar to the US, the UK’s inflation moderating agenda has raised risks of the country facing an economic recession. While the Bank of England expects that an economic recession in the UK will be shallower than previous recessions in the 1980s, 1990s or 2000s, it is likely to be the longest recessionary period faced by the UK.
"The government’s limited finances will restrict Sunak’s ability to mitigate recessionary pressures on both households and businesses in the UK, which could in turn heighten public discontent towards the government.”
In October, the UK noted its largest wave of simultaneous protests across several cities coordinated by trade unions and community organisations against the government’s management of the economy and rising living costs. The government’s limited finances will restrict Sunak’s ability to mitigate recessionary pressures on both households and businesses in the UK, which could in turn heighten public discontent towards the government. This will raise questions around Sunak’s ability to credibly lead the Conservative Party into general elections which need to be called by January 2025.
Restoring party unity
Disunity and divisions have grown considerably within the Conservative Party. The resultant discord over Brexit, multiple leadership changes since 2016, and policy volatility have cumulatively led to the Conservatives trailing the opposition Labour Party by over 30 percentage points in recent opinion polls. In an attempt to rebuild unity, Sunak has promised to appoint cabinet members from various factions across the party, which if successful, should secure the foundations necessary to regain the trust of the electorate. More importantly, a unified government will provide Sunak’s administration with the comfort of focusing on restoring the UK’s economic prospects, a feat essential for Sunak’s ability to demonstrate the strong and stable leadership required to arrest the opposition’s growing popularity.
Broad-based socio-economic challenges could derail Sunak’s success
Sunak’s economic and political obstacles have materialised against a backdrop of greater socio-economic challenges. Households and businesses in the UK have been grappling with rising cost pressures since the onset of the Covid-19 pandemic, and these pressures are being exacerbated by rising inflation on a global level. Social grievances in the UK have already manifested as protest action as mentioned above. Additionally, the rail sector has faced frequent disruption from rail union strikes demanding inflation-matching pay increases, and in July 2022, rising fuel prices prompted commuters to stage blockades along several UK highways. As recessionary pressures grow and deepen the UK’s economic challenges, growing anti-government sentiment over perceived economic mismanagement holds the potential to reignite and intensify commercially disruptive protests.
Having inherited a recession prone economy and a disunited party alongside limitations to the government’s ability to provide accommodative fiscal support, Sunak is undoubtedly faced with the tough task of delivering stability amidst considerable fragility.