It looks like Rishi Sunak has a good chance of becoming Prime Minister after Boris Johnson withdrew his challenge with a judicious and well phrased statement. I welcome Sunak who I always thought was the best candidate and his financial background should at least mean that he understands how to manage the economy and stabilise markets – the same cannot be said for Penny Mordaunt.
Liz Truss and her Chancellor did not seem to comprehend that the UK cannot plough ahead with massive tax cuts and increases in Government borrowing without considering the international reaction from the IMF and those who would need to finance the borrowing.
Neither they nor the advisors in the Treasury and the Bank of England seem to have learned from history. Back in 1974 after a boom generated by Barber the Conservatives lost an election to Labour but by 1976 Harold Wilson had resigned and James Callaghan faced a run on the pound, The UK Government had to go to the IMF for a massive loan obtained with promises of budget cuts.
The moral is that the UK cannot make financial decisions about the economy and Government debt without taking into account the reaction of lenders. The Prime Minister and Chancellor might have thought they were masters of their own destiny but they were grossly mistaken about the real world we now live in.
Barber’s tax-cutting boom also generated high inflation so you can understand why the international financial community ran scared in the face of another similar result. That raised the spectre of falling gilt prices and higher gilt yields thus destabilising both gilt and equity markets. Pension funds were badly affected because of the LDI investment strategies used by pension funds which caused them to dump property funds.
Liz Truss does not seem to have realised that the UK is a small player in international financial markets. The UK cannot act regardless of the opinion of others however attractive it might be to play to the home crowd by pushing for a “growth” policy.
Perhaps she was badly advised by those too young to remember past events in history. But Rishi Sunak had a different plan which we will no doubt now fall back on.
Some people have called for a general election at this point in time but the last thing we need is several months of political knock-about theatre. That would not inspire international confidence. Sunak should help to stablise markets even if he has some tough problems to cope with such as the ongoing energy crisis, war in Ukraine and high inflation. But my view is that a Sunak premiership should be good for the UK stock market.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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