The new prime minister must restore market credibility, tackle inflation and drive growth.
Image source, Getty ImagesRishi Sunak enters Number 10 today having made very few promises and said very little in this leadership campaign.
He has experience of “profound economic challenges” having steered the economic response to the pandemic lockdowns, creating from scratch the furlough scheme – the state-funded subsidy of the wages of 11 million British workers.
The country faced massive unemployment and possible depression from the impact of Covid. His team at the Treasury and HMRC turned around the furlough and self-employment schemes incredibly quickly, helping keep unemployment at record lows when it was expected to hit double digits.
But what Mr Sunak faces now is a different type of challenge, where he is constrained from doing “whatever it takes”, as he famously said during the pandemic.
From just over a year ago, he was privately warning that a wave of inflation was coming, out of the after effects of the pandemic. What we now have is generationally high inflation, high debts, low growth, and a need to fully regain lost market credibility.
His appointment has already calmed the markets, with effective government borrowing rates now back to the levels seen just after the mini-budget. If sustained, that could filter across the economy, limiting the rise in mortgage and business lending costs.
And it could save billions off the government’s spiralling interest bill.
However, he will need to deliver a set of sober, credible borrowing numbers, which will require either tax rises or spending cuts, due to be announced on Monday. The scale of these decisions will prove a significant test of party unity.
Earlier this year Chancellor Sunak backed both rises in National Insurance and raising the value of taxes and benefits in line with the current 10% rate of inflation.
Unlike during the pandemic, the Bank of England will not be buying up government debts, keeping down borrowing costs. Indeed, they are planning to do the opposite, as well as raising base rates.
While the widespread assumption is that he will continue with Jeremy Hunt as chancellor, the decision on who occupies Number 11 will reveal a lot about how the new PM will run his government. Will he delegate big economic decisions, or will he effectively be his own chancellor?
And then there is the big structural challenge. Without his own mandate from the people he will rely on that provided by the 2019 Tory manifesto. But post pandemic and post energy crisis, the priorities of three years ago may not be fully reconcilable with the immediate tough decisions now required.