British Prime Minister: Boris Johnson inflicts an economic “catastrophe” on his successor

For months, the UK suffered a leadership vacuum as the country slid into a recession and a humanitarian crisis triggered by soaring energy bills.

Since Boris Johnson announced he would leave office in July, growth prospects have weakened. Annual inflation is above 10% due to soaring food and fuel prices. Frustration over the rising cost of living has forced hundreds of thousands of port, train and mailroom workers to strike. The pound has just recorded its worst month since the day after the 2016 Brexit referendum, hitting its lowest level against the US dollar in more than two years.

“It’s just one shot after another,” said Martin McTague, who heads the UK Federation of Small Businesses. “I’m afraid I can’t find any good news.”

The situation may well get worse before it gets better. The Bank of England expects inflation to jump to 13% as the energy crisis intensifies. Citigroup estimates UK inflation could peak at 18% in early 2023, while Goldman Sachs warns it could hit 22% if natural gas prices “stay high at current levels”.

Johnson’s successor suitors – current Foreign Secretary Liz Truss and former Finance Minister Rishi Sunak – face calls to announce a dramatic intervention as soon as a two becomes the country’s fourth Conservative leader in a decade.

The most pressing issue will be coping with soaring energy prices, which could trigger a wave of business closures and force millions of people to choose between putting food on the table and heating their homes this winter. Experts have warned that people will become destitute and cold weather deaths will rise unless something is done quickly.

“Everyone assumes there will be a quick and decisive announcement that will put this issue to bed, or at least put people at ease,” said Jonathan Neame, who runs Shepherd Neame, Britain’s oldest brewer. “If there isn’t, that person will be under very considerable pressure.”

An energy “catastrophe”

Household energy bills will rise by 80% to an average of £3,549 ($4,106) a year from October. Analysts say the household price cap could rise to over £5,000 ($5,785) in January and exceed £6,000 in April ($6,942).

As people are forced to reevaluate their budgets, the consumer boom that followed the Covid-19 lockdowns is rapidly dissipating. The Bank of England has warned that the UK economy will fall into recession in the coming months.

“The main challenge posed by soaring energy prices is that high-energy-consuming households – and especially poorer households – are going to really struggle to make ends meet,” Ben Zaranko said. , senior research economist at the Institute for Fiscal Studies. “It’s going to mean very big cuts in other areas of spending.”

Meanwhile, Neame, whose portfolio includes around 300 pubs in the south of England, said business owners are panicking. They get insane numbers for next year’s utility bills, if they can find suppliers. Nick Mackenzie, the head of the Greene King pub chain, said a place he works with reported its energy costs had jumped by £33,000 ($38,167) a year.

“It’s really daunting for many businesses, especially those that have come through Covid in a weakened state,” McTague said. “They are now struggling to deal with another once-in-a-lifetime disaster.”

The weakening of the pound sterling could exacerbate the problems, making it more expensive to import energy and other goods, pushing inflation even higher.

Overlapping Crises

That’s not the only reason business owners and investors are increasingly anxious. While vacancies fell between May and July, they remain 60% above their pre-pandemic level. Finding workers to fill vacancies has been a particular challenge in the UK since the country voted to leave the European Union. According to the Office for National Statistics, around 317,000 fewer EU nationals lived in the UK in 2021 than in 2019.
An information sheet posted outside Victoria Underground station in London on August 19, informing the public of planned strike action.
Brexit is also blurring trade, especially with the European Union, the UK’s biggest trading partner. Exports and imports will be around 15% lower in the long term than they would have been had the UK remained in the EU, the Office for Budget Responsibility has predicted.
Dean Turner, UK economist at UBS, said it was up to the new prime minister to try to make the most of the country’s position without creating further disruption. Yet hardline UK lawmakers continue to push to shelve a key part of the Brexit deal Johnson signed with the European Union, which could ultimately spark a trade war with the biggest export market. from the United Kingdom.

“Brexit has happened. It is what it is, we all have our own opinion on it,” Turner said. “But we have to work with him to make him better for us, and I’m just struggling to see if there’s any momentum to do that.”

No easy solutions

Truss, who is expected to take the reins from Johnson after his government collapsed under a pile of scandals earlier this summer, has pledged to revive the economy by cutting taxes. But many economists worry that this approach will stoke inflation and hurt fragile public finances, while failing to put money in the pockets of those who need it most.

“The advantages of cutting [taxes] would largely go to the people who pay the most taxes, which are usually people with more money,” said Jonathan Marshall, senior economist at the Resolution Foundation.

There is no question for the State to avoid spending huge sums to deal with the energy situation this winter, but targeted measures will be necessary to avoid waste. Freezing gas and electricity prices over the next two winters could cost the government more than £100 billion ($116 billion), according to researchers at the Institute for Government.

“Energy is expensive, gas is expensive,” Marshall said. “To keep people from freezing in their homes, it has to be paid for. But the state doesn’t need to pay for people who can afford it.”

Foreign Secretary and Conservative leadership candidate Liz Truss speaks on stage August 23 in Birmingham, England.

There are also questions about how the new government will afford large-scale economic intervention, especially if cutting taxes – and therefore government revenue – is the priority.

The UK government has borrowed heavily to provide support during the coronavirus lockdowns. The country’s debts now represent almost 100% of its gross domestic product. When interest rates were at their lowest and access to cash was cheap, this was not a major issue.

But this is no longer the case. The Bank of England has raised rates aggressively as it tries to contain inflation. This will make it increasingly costly for the government to service its debt. The UK has also issued a large number of inflation-linked bonds, adding to its vulnerability.

“It’s an almost perfect cocktail of challenges that make public finances riskier than they have in recent times,” said IFS’ Zaranko.

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