The government will need to demonstrate it can tackle immediate macroeconomic pressures, which will likely translate into a new period of fiscal austerity
PM Rishi Sunak will maintain the previously announced U-turn on the mini budget, with more cuts to spending likely to be delivered once the Autumn budget is announced at the end of October. MNCs should expect to see a substantial easing in both business and consumer demand as the economy enters a contraction, and as the cuts bite into households’ purchasing power. The greater focus on fiscal management and consolidation, however, should stabilize the embattled GBP and translate into greater policy predictability in the short term.
Overview
- UK Prime Minister Liz Truss announced her resignation after only 45 days in office.
- Truss’s resignation was triggered after a controversial fiscal reform that spooked financial markets and led to a sharp increase in lending rates and a drop in the GBP.
- After a brief leadership contest, Sunak, a former chancellor, was chosen as the UK’s new prime minister.
- Jeremy Hunt will retain his role as chancellor, indicating fiscal policy continuity in terms of Sunak’s earlier plans, outlined during the summer, which will see a rise in the corporate tax and concentrated efforts to consolidate the budget.
Our View
Sunak’s premiership will focus on fiscal consolidation, suggesting that the measures announced by Chancellor Jeremy Hunt will remain in place, such as removing the plan to change income tax rates, implementing the previously scrapped corporate tax hike (25% from 19% in 2023), and maintaining the energy price cap for only six months. The latter confirms our expectations that inflationary pressures in 2023 will be significantly higher than elsewhere in Europe and that a recession for the whole year is inevitable. Even with these U-turns, however, the new government will have to plug a gap of about GBP 32 billion, with additional details expected to be announced on October 31, when the Chancellor reveals the new Autumn budget. While it is unlikely that the government will reinstate the national insurance hike, it is likely that cuts in real terms on departmental and social policy expenditures will be implemented, which will have a pronounced effect on B2G demand. In effect, the election of Sunak as PM should ensure some more policy predictability and stability and serve to calm financial markets in the short term. The damage to the UK’s credibility has been done, however, and the government will need to demonstrate it can tackle immediate macroeconomic pressures, which will likely translate into a new period of fiscal austerity. On a more encouraging note, Sunak will likely seek to strike a more compromising tone with the EU over the Northern Ireland protocol, which should help the UK avoid punitive trade measures by the EU, which would drive the economy into a much steeper recession.
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