October 26, 2022

In Brief: Britain’s Rough Justice for Rishi Sunak

The new prime minister inherits the economy he helped to break.

There’s been a bit of stewing in America about the travails of now-former British Prime Minister Liz Truss. Her 44-day tenure of failure is supposedly a warning to Republicans about tax cuts and economic mismanagement. Almost the opposite is true. As for her successor, Rishi Sunak — the first PM of Indian descent — The Wall Street Journal editorial board says he might have just gotten what he asked for.

Rishi Sunak must not have heard the story about the curse of getting what you most want. On Monday he became British Prime Minister by default, the third one in two months, when Conservative lawmakers failed to nominate an alternative candidate. Now Mr. Sunak gets to manage the economy he helped to break.

Mr. Sunak’s predecessor, Liz Truss, resigned last week after the Tories rebelled against her supply-side economic agenda. The rationale for selecting Mr. Sunak is that, as a former Chancellor of the Exchequer respected by markets, he can stabilize the exchange rate and the market for government bonds that were set aflutter by Ms. Truss’s tax-and-deregulation proposal.

Combatting inflation is always going to be painful, and now it’s “Sunak’s problem.”

And what is his solution? As Chancellor under Boris Johnson, Mr. Sunak imposed tax increases on payrolls and corporations, plus a stealth tax hike on incomes via freezing income brackets amid inflation. That was set to drag the government tax share of GDP to its highest level in 70 years.

These tax increases contributed to the current stagflation by depressing productive private investment. The new Prime Minister at times has hinted he was unenthusiastic about some of those policies, which he blamed on Mr. Johnson. Now he’s stuck with a mandate to implement them anyway. He also is stuck with many of the net-zero climate policies driving up energy costs, which Mr. Sunak didn’t fully eschew as a leadership candidate.

In other words, he’s going to have to clean up his own mess and he’s expected to do more of what made it in the first place. Initially, markets have responded favorably to his rise, but that may not last. The Journal’s editors conclude:

Sunak plans to placate bond markets by immiserating households and businesses with higher taxes and lower growth to forestall the higher yields bond investors fear.

The Tories seem to think this is a winning electoral strategy, and good luck to them. An early election is becoming harder to resist by the day. Mr. Sunak can try to hang on until January 2025, the latest date at which an election must be held. But recent months have laid bare the Tories’ political divisions and intellectual exhaustion after 12 years in power. The rough political justice for Mr. Sunak is that he will have to lift the economy, and the Tories, out of the deep hole he helped to dig.

Read the whole thing here.

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