By lunchtime today (5th September) the UK will know who it’s new Prime Minister is. After two months of hustings and increasingly vitriolic debate, a diverse field of eight candidates was whittled down to two frontrunners, former Chancellor of the Exchequer, Rishi Sunak and foreign secretary Liz Truss. The bookies favour Truss to become the eventual winner.
Whoever takes on the role will have an overflowing in-tray of urgent concerns and the markets will be watching carefully. This could be the shortest honeymoon in prime ministerial history, as immediate action needs to be taken on several fronts.
The most pressing concern is dealing with spiralling energy prices, which could hit £4,500 per household next year and an increasing cost of living crisis. Increasing levels of industrial action with barristers walking out of court today, the postal service planning two strikes this week, airport staff, Scottish binmen all striking, and a ballot by NHS nurses this week, could quickly escalate into a (freezing cold) winter of discontent. Annual inflation is running at over 10%, and sterling just logged its worst performance since the UK exited the European Union.
The FTSE All-share opened today at 3,998.5 and had dropped a further 1% in early morning trading.
Only having to deal with domestic issues would be more than enough for Boris Johnson’s successor, but also having to contend with the war in Ukraine and its impact on the UK’s biggest trading partner, the EU, climate catastrophe, a resurgent and belligerent China and the continuing fall-out of Brexit adds more immediate and urgent workload by the shovelful to the new Prime Minister.
Why anyone would want the job and fight so hard for it is a mystery.
Former Shell executive, Truss, a self-proclaimed “environmentalist” and “eco-warrior” has promised “quick and decisive” action on the energy crisis, within one week of assuming office, but has been coy on her specific plans throughout the leadership campaign.
It is likely that Truss will issue new exploration and production licences for oil companies operating in the North Sea, although given (according to some energy commentators) that the average licence takes 18 years to go from initial exploration to commercial production, what immediate and decisive impact this will have on gas bills in January remains to be seen.
It is also likely that Truss will increase the licences for onshore fracking. In terms of direct action, it is likely that Truss will increase government borrowing to offer aid packages to the most disadvantaged in society – those receiving Income Support and pensioners. However, Truss has stated that she is against “handouts”, so as to what aid the rest of the country will receive, it’s anyone’s guess.
Sunak on the other hand is more in favour of directed assistance and pledged to raise GBP10bn from cuts in VAT on fuel and other services, and a windfall tax on energy companies. Sunak also stated that he aimed to make the UK energy independent by 2045, increasing exploration and production in the North Sea and developing onshore fracking, as well as increasing the roll-out of more offshore and onshore wind, solar and nuclear and offering incentives to insulate homes and businesses more efficiently.
Cost of living
Again, Truss has been a bit backward in coming forwards with her plans to deal with the cost-of-living crisis. From the outset, Truss announced her support for cutting taxes, which has put clear blue water between her and her competitor Sunak.
Tax cutting from an ideological sense was a tactical move that pushed Truss’ candidacy forward amongst the membership of the Conservative Party, the caucus candidates had to impress to get the top job. Not scared to invoke the ghost of Margaret Thatcher, Truss could cut VAT from 20% to 15% at a cost of GBP38m a year.
Truss also has declared her support for cutting the basic tax rate by 20% and raising the minimum threshold from which higher earners pay income tax and reverse the rise in National Insurance, again which critics claim will only benefit the richer in society. The theory is that with more money in people’s pockets, they can pay for things like food, heating and fuel more readily.
Sunak instead offered GBP650 to eight million lower income households to help them with their shopping and gas bills. He also pledged to help UK families through a series of emergency support payments and would suspend the rise in VAT he announced earlier this year for 12 months.
UK Labour Market
Sunak was not shy of promoting his own Thatcherite credentials when discussing industrial strategy. Arguing more people were claiming benefits than in work – a claim debunked by many economists on the Left – Sunak promised to get tough on unions and get more people back to work by cutting benefits.
Truss went further, offering a serious crackdown on Trade Unions and mandating a minimum service requirement in public services. Her plans have set her at loggerheads with the Trade Unions, who promised to double-down and invoke mass, national industrial action if Truss tried to curtail their operations anymore.
Truss has been one of the most hawkish ministers in a very raptor-like government when dealing with Russia and its invasion of Ukraine. Her mantra of “Putin must lose” has reduced any angles she may have for negotiation with Russia. She has also been undaunted to confront China over Taiwan in the Pacific. It has been said that the UK’s closest allies, the US regard truss as a “bull in a China shop” with regards to international diplomacy. Truss is keen on building trade links with Asia and the developing world post-Brexit
Sunak has also taken a hard line on Russia, increasingly-so since the start of the leadership contest. A Brexiteer from the off, he has a somewhat better relationship with the US than his opponent
Impact on Financial Markets
The consensus amongst traders is that a Truss win would have a negative effect on the financial markets. Her plans to increase public borrowing and decrease taxes would spark losses in the UK currency and bonds market. Also extending payback of Covid-related government borrowing has disappointed many in the financial sector. A critic of the Bank of England’s handling of inflation and a possible reigning in of the institution’s independence should she become Prime Minister has alarmed the financial sector.
Sunak, a former banker and hedge fund manager, is a darling of the City. Seen as predictable and steady, and would, according to consensus have less of a negative impact on the markets as Prime Minister.
We will soon find out who is the next British leader, but whoever assumes the mantle is walking into a maelstrom of pressing issues that require immediate action. Even the best possible candidate is going to have an almost impossible job to keep the economy from plunging off a cliff edge into recession in 2023.