- What are Rishi Sunak’s pledges to restore the UK economy?
- How does Rishi Sunak want to revive the UK economy?
- What does Rishi Sunak’s plan to tackle the UK economy entail?
When Rishi Sunak took office in 2022, he promised to take action against the economic crisis. He also renewed his pledge to fix the UK economy in his first great speech in 2023.
But, months after taking office, the UK economy is still in crisis.
The economic growth is slow. The UK economy is tipped into recession. Inflation and interest rates are high, and households’ real disposable income is falling to an unprecedented level.
However, less than two years before an election, Rishi Sunak is desperate to convince ordinary citizens that Conservatives are still trustworthy.
But, Rishi Sunak’s action against the economic crisis doesn’t tackle the problems without bringing in new issues.
Rishi Sunak’s action against the economic crisis began with making pledges
When Rishi Sunak was appointed prime minister, in the inaugural speech, he pledged to take action against the economic crisis by placing economic stability at the centre of his agenda, “I will place economic stability and confidence at the heart of this government’s agenda”.
Then, on 4 January 2023, Rishi Sunak made his first major speech of 2023. Again he made vital promises. Foremost among them was that he would bring stability back to the economy and take action against the economic crisis. In his speech, he set out five promises.
“I want to make five promises today, five pledges…we will Halve inflation, grow the economy, reduce debt, cut the waiting list and stop the boats. These are people’s priorities, and they are your government priorities, and we will either have to achieve them or not”.
- Rishi Sunaks’s action to halve inflation created a recession
Rishi Sunak’s plan to decrease inflation has tipped the UK economy into a recession. To slow down inflation, the Bank of England has raised interest rates to 4%, their highest level in 14 years.
The rising interest rate makes borrowing costs more expensive. For example, mortgage and loan costs jump higher with interest rates.
Following it, people have less money to spend and buy fewer things, reducing the demand for goods and slowing price rises.
The decrease in consumption could then decrease corporate sales and earnings, paving the way for recession and slower economic growth.
2. Rishi Sunaks’s action to halve inflation does not slow down prices
Although inflation has dropped from 9.2% in December 2022 to 8.8% in January 2023, it doesn’t necessarily mean prices will start falling. It just means they stop rising as quickly.
This was also highlighted by the senior advisor at financial service firm Wesleyan, Richard Olive, “Prices are going to keep rising, just not as quickly. Pressure on budgets will still be painfully tight, especially if people’s pay packets haven’t grown as quickly as their bills”.
Moreover, despite Rishi Sunak’s promise to halve inflation, the inflation rate remains close to its highest level for 40 years.
3. Rishi Sunak raises corporate tax rate during the recession
When the economy is in recession and companies make less money, they leave the government with less tax revenue to spend on public services.
In other words, tax revenues are expected to come in less strongly for the UK government when the UK economy is weaker.
In response, Rishi Sunak has decided to raise corporate tax. Upon it, in the earlier UK budget, the corporate tax is scheduled to rise from 19 per cent to 25 per cent in April 2023.
Consequently, the rise in corporate tax would raise labour costs and unemployment. It also reduces the profitability of new corporate investments and discourages the incentives to increase production. Sustainable growth happens when profitability is high, and a large part is re-invested to create more profit.
Given that the UK is the only G-7 economy not to have re-attained its pre-pandemic GDP level and its growth rate has lagged all other G-7 nations, Rishi Sunak’s decision to increase corporate tax would add to the predicaments of the UK economy.
4. Rishi Sunak’s action to reduce debts discourages investment
According to Reuters, the UK public finances have a 50 billion pound hole consisting of the UK general government gross debt and deficit.
This deficit is higher than at any point since 1963, when Britain was still paying off debts accumulated during World War II.
But, Rishi Sunak’s government is seeking to fill 20 billion of this hole by raising taxes and the other 30 billion by spending cuts.
However, rising corporate tax means the UK would lose its highly competitive 19 per cent corporation tax rate, depressing multinationals to invest in the UK economy.
Already, many investors have lost their confidence in the UK economy as they saw how Truss’ unfunded tax cuts spooked the bond market.
5. Rishi Sunak’s action to halve inflation adds to debt interest
The government increased the interest rates to 3 per cent in November 2022 in the most significant interest hike in 30 years. The rise in interest rates is aimed at warding off soaring inflation.
Since then, however, the government has been pressured to spend more interest payments on what it owed. The total amount that the government owes is called national debt and is around £2.49tn.
According to the Office for Budget Responsibility, high-interest payments on the debt would add £52bn a year to borrowing by 2027/2028.
In other words, the government is expected to pay £100bn in 2022 and 2023 on debt interest, which is higher than it spends on education.
However, Rishi Sunak’s decision to raise the interest rate from 3.5% to 4% in February 2023 strongly contrasted with his promise to reduce debt.
With the higher interest rate, interest payments on government debt would rise, putting more strain on the already shrinking UK economy.
6. Rishi Sunak’s action to reduce debt steers to spending cuts
As mentioned earlier, the UK’s public finances have a 40 billion pounds fiscal gap, and Rishi Sunak has to find a way to fix it. On that, his government is set to draw up spending cuts.
But many people believe that even the existing budget in critical areas like health and education needs to be revised.
For example, Frances O’Grady, the general secretary of the Trade Unions Congress (TUC), warned against a fresh squeeze on the public sector, “Our NHS, schools and all our public services have been slashed to the bone over the last 12 years. There is nothing left to cut”.
But, the fact that Rishi Sunak denies public services is in a critical situation and is planning to cut its spending shows he is not using it.
It is not surprising, though, since he is the richest-ever prime minister of the modern time. His family fortune is estimated at 730 million pounds.
In this regard, many critics even question whether Rishi Sunak can understand the daily difficulties many people are struggling with due to the daily poor deliverance of public services.
7. Rishi Sunak’s action to reduce debt slows down economic growth
Reducing the spending on public services to reduce debt would also adversely impact economic growth.
For example, spending cuts on education deprive a country of a higher-skilled workforce, leading to lower productivity, innovation and inward investment.
Moreover, companies choosing where to locate and invest are more likely to choose a country that offers better public services. Thus, spending cuts in public services will pull businesses out of the UK.
This also contradicts what Rishi Sunak has earlier announced for stimulating growth. He believed the change comes from creating conditions for the private sector to grow, which naturally cannot be provided by spending cuts on public services.
An analogy can be drawn between the UK economy in the 2010s and 2022-2023 by looking back on the austerity of the 2010s. In the 2010s, also austerity produced shallow growth, zero productivity and low investment.
Today, the UK economy is going into a similar loop where all the government can do is levy more taxes and raise spending cuts in the hope that the economy finally grows.
In any case, Sunak is likely to be the fifth and final Tory prime minister of this era. He is a caretaker prime minister who owes his position to the failures of his predecessors and is trapped by their legacy.
Although on many occasions, he wanted to show the voters that he was sharing their concerns so that they rewarded him with more time in office, this is unlikely.
It is not only that he cannot prescribe meaningful solutions to the UK’s economic problems. But he doesn’t have an overall vision for Britain that gives people hope for the future.
Even though at the beginning of the year, he laid out five promises for 2023 in his big speech, there was no overarching promise or brighter future or anything beyond wanting to get the economy back on track.
This, as a whole, fits with the sense that the Conservatives are at the end of the game. The economic model that they offered has failed to deliver rising living standards.
Rishi Sunak cannot provide more than the same, and the same has never been great over the last few years.