The markets’ sigh of relief after Rishi Sunak’s anointment as Britain’s Prime Minister resonated across the world. Almost immediately the pound and the bond yields started stabilising. Sunak, given his 15-year stint in investment banking starting with Goldman Sachs, seemed the market’s hand-picked candidate for the top job.
If one chooses to keep ethics aside, it’s quite apparent that Boris Johnson’s abortive bid to become Prime Minister again was scuttled by the very visible hand of the market.
This saga of the financial markets driving the vicissitudes of British politics is rich with irony. It was Margaret Thatcher who in the 1980s, during the heyday of the resurgent Right, turned the City of London into a global financial hub. It was Thatcher who presided over the decline of British industry, decimated the power of unions, and turned Britain into a services-led economy.
“The irony that it is this very financial market, worshipped by the Conservative grandees, that is now eroding the sovereignty of the Conservative Party is hard to miss.”
The irony that it is this very financial market, worshipped by the Conservative grandees, that is now eroding the sovereignty of the Conservative Party is hard to miss.
How the crisis unfolded
The seeds of the present political and economic mess in the UK were sown during the self-lacerating Brexit referendum of 2016. UK’s then Prime Minister David Cameron called for a referendum on the UK ‘s membership of the European Union. A referendum, in which even the Conservative Party was divided (Theresa May and Liz Truss voted to remain in the EU, while Boris Johnson and Rishi Sunak were committed Brexiters), narrowly went in favour of the UK leaving the EU and things have since gone downhill.
The process of untangling the UK economy from the EU has been messy and that’s putting it mildly. The acrimony and lack of trust between the UK and EU officials only made a bad situation worse. The UK mistakenly believed that its economic interests would be better served by leaving the EU and pinned its hopes on the free trade agreement with the US, which never materialised.
But despite this mess, the Conservative Party won a comfortable majority in the 2019 elections, led by the radical Brexiter Boris Johnson. But Johnson’s reign ended in ignominy when he was found guilty by a Parliament Committee of having broken lockdown rules by partying in 10 Downing Street.
Lizz Truss defeated Rishi Sunak in the ensuing leadership battle, paving the way for more turmoil.
Truss’ disastrous stint
Lizz Truss’ 45-day reign, the shortest so far, was an unmitigated disaster. Her 45-billion pound unfunded tax cut to the rich offered in her ‘mini-Budget’ was supposed to spur growth and pull Britain out of its economic mess.
In her defense, this is something she had promised during her bruising battle with Sunak for the top job in British politics. Despite Sunak’s dire warnings on this disastrous plan — a run on the pound, and rising borrowing costs — the Conservative Party grandees voted for Truss.
Truss’ plan led to all that Sunak and others had predicted and more. She had to sack her Chancellor of Exchequer Kwasi Kwarteng, the architect of this plan, and the new Chancellor Jeremy Hunt ended up rolling back all the proposals of the mini Budget to calm the markets’ nerves.
Truss’ ‘mini-Budget’ invited a stinging rebuke from not just global investors — Bank of America, Goldman Sachs — but even the IMF. The IMF’s very public criticism of the UK, the beacon of free-market liberalism, would have brought more than a few chuckles among policymakers in emerging economies. After all, in the 1980s-90s, it was these emerging economies that were at the receiving end of IMF’s harangue for not opening up their economies to global finance capital.
The Bank of England quickly stepped in with a plan to buy 65 billion pounds worth of bonds to prevent a free fall in the bond market that would have hit funds managing pensioners’ money — a clear indication that the BoE and the UK government were not in sync with each other.
Sunak now has an unenviable task of somehow finding a way to bring down debt and raise taxes, which will inevitably hit growth, which is not good news for the Conservative Party going into the 2025 elections. He has already warned of painful decisions in his first speech at 10 Downing Street after becoming PM, adding that the UK was in the grips of a “profound economic crisis”.
For now, the Sunak-Hunt duo has bought time till November 17 to unveil a fiscal plan and the markets are breathing easy. There are already murmurs of the axe falling on public services and another bout of austerity for the British people bracing for a difficult winter in the shadow of the Ukraine-Russia war.
Interestingly, both the Left and Right are suspicious of Sunak. The Right is worried about his radical Brexit stance and the concessions he may have to make to the radical right on legal immigration. The Left is understandably worried over the expenditure cuts on public services and their impact on the poor.
UK-India trade ties
Both Prime Minister Narendra Modi and Sunak have pledged to speed up the India-UK free trade pact. But Suella Braverman’s return as Home Secretary is bound to raise eyebrows in the South Block as her recent remarks on Indians overstaying their visas in the UK did not go down well.
Will Sunak walk the talk or give into the radical wing to secure his position within the Conservative Party?