Glasgow, September 6 (The Conversation) Liz Truss is set to be confirmed as Britain’s new Prime Minister after a long and intense leadership contest against former Chancellor Rishi Sunak. But the UK faces significant economic problems this autumn that could leave the new Prime Minister wishing she hadn’t fought so hard for the job.
Truss appealed to members of the Conservative Party – those eligible to vote in the contest – with the simplicity of her message: she promised to cut taxes, get rid of EU laws, reverse the increase national insurance and put a moratorium on the green energy tax, which allows consumers to pay part of their energy bill for environmental projects.
However, his immediate period in power is unlikely to be straightforward. The two most pressing issues facing the country are high inflation and high energy prices. Even if the rise in energy prices is the main contributor to inflation, the two problems are not identical and will call for different responses.
During the leadership campaign, Truss resisted pressure to freeze the cap on energy prices for the next six months so that energy companies could not impose another price hike. This risks pushing two-thirds of UK households into fuel poverty, as they will not be able to heat their homes to recommended healthy levels.
The seriousness of the problem was illustrated when Christine Farnish resigned as director of energy regulator Ofgem just before Truss took office. Farnish said she believes the regulator is putting supplier interests above consumer interests.
Meanwhile, inflation hit 10% in July, meaning prices were 10% higher in July 2022 than in July 2021. This is the highest inflation rate in 40 years. What is more worrying is that the increase in inflation is not only due to high energy prices but also to high food prices.
The cost of milk, for example, has gone up 40% in the last year alone. Many products that are rising in price (including milk) are generally resisting inflationary pressures, indicating that inflation is here to stay. All of Truss’ immediate actions will take place in this context.
Financial and political costs Bringing down inflation and meeting the rising cost of living will be financially and politically difficult. The COVID shutdowns and the war in Ukraine are not the only factors causing high inflation. Low interest rates and quantitative easing have also contributed to rising asset values and higher household spending since the 2008 financial crisis.
This means that the Bank of England will still have to raise the interest rate. Higher interest rates make money and borrowing more expensive, reduce economic activity and ultimately employment. The Bank of England has previously warned that the UK will enter a period of economic recession due to high inflation and rising interest rates.
Not all households are affected in the same way by the measures needed to stabilize inflation. The wealthy are seeing their savings increase while those who have no savings and depend on their work to earn a living are the ones who will feel the consequences of the recession. However, middle-class households will also feel the economic effects of stabilizing inflation as their mortgage payments rise.
Truss is likely to suffer electorally from a rise in interest rates, especially as after years of fiscal austerity, public services are struggling and social benefits are minimal, making the effect of the economic recession even harder on low- and middle-income households. Historically, governments have been quicker in reducing inflation and more aggressive in raising interest rates when they can rely on a generous welfare state and unemployment benefits to protect people.
The new Prime Minister’s negative stance towards trade unions could further reduce public support for his government. Truss said she would not work with unions to tackle the cost of living crisis, risking a long period of strikes across the country as wages fell below inflation.
With all of this happening quickly, it’s hard to see the new prime minister gaining huge voter support in the upcoming election, especially given the stance she’s taken on economic issues during the leadership campaign. In fact, it’s hard to see why anyone would want to be prime minister right now. (The Conversation) AMS AMS