Rishi Sunak is set to inherit one of the most daunting in-trays in recent British political history with the economy facing a long recession, “eye wateringly” difficult decisions on government spending and a deeply divided Conservative party.
The former chancellor is poised to become Britain’s fifth prime minister in six years after Boris Johnson pulled out of the Tory leadership contest last night and more and more Conservative MPs backed him ahead of Penny Mordaunt.
Mr Sunak, who was beaten by Liz Truss in the summer battle for the Tory crown, has said little in the past few days about his agenda but has warned the UK faces a “profound economic crisis”, adding: “I want to fix our economy, unite our party and deliver for our country.”
But economists warned Mr Sunak that the UK economy faced a “tough line to walk” as it attempts to restore the confidence of markets after they were spooked by Liz Truss’s tax-slashing mini-budget last month.
Megan Greene, global chief economist at the Kroll Institute, said: “Boris Johnson pulling out gives us more certainty. It seems like Rishi Sunak will be the next prime minister but even then the UK has a really tough line to walk.
“On the one hand it can’t provide these budgets that are fiscally irresponsible. Equally Rishi Sunak is likely to come and announce quite a lot of austerity and he can’t go too far on that end either because the markets will look at that and think the UK is never going to grow.”
Chancellor Jeremy Hunt is still planning to deliver a pivotal fiscal statement next Monday, along with a forecast by the independent fiscal watchdog, the Office for Budget Responsibility.
Mr Hunt, who last night pledged his support for Mr Sunak, has already ripped up £32 billion of £45 billion tax cuts announced in Ms Truss’s mini-budget on September 23. But he is also expected to set out departmental cuts of “eye watering difficulty” as he attempts to fill a £40 billion hole in the UK’s public finances. He is also reported to be considering further windfall taxes, possibly on banks, to try to plug the gap and start reducing debt as a proportion of GDP by 2028.
With the UK expected to slide into a 15-month recession, inflation at 10 per cent and universal support for energy bills due to run out next April, the former governor of the Bank of England Lord King has warned that Britons could be facing years of financial hardship.
Despite a majority of Tory MPs publicly endorsing Mr Sunak by this morning, the former chancellor still faces a major battle to reunite his party and heal the divisions exposed by the bruising leadership contests of the past four months.
He is still blamed by some close allies of Mr Johnson for triggering his downfall when he resigned from his Cabinet in July. One of Mr Sunak’s supporters, Grant Shapps, now Home Secretary, insisted today that the former chancellor would appoint a government of all the talents, building a coalition from the right and the left of the party.
Mr Sunak is said to have reached out to Eurosceptic MPs to reassure them that he will continue to take a hard line on Brexit and the stand off with Brussels over the Northern Ireland protocol. He also said during the summer that he would back the contentious policy on sending illegal migrants to Rwanda.
The war in Ukraine will also be at the top of Mr Sunak’s in-tray amid growing fears that Vladimir Putin could look to detonate a nuclear weapon and may step up his new tactic of targeting urban areas and power facilities with drones.
Against the backdrop of a deepening crisis, he will be under pressure to commit to Ms Truss’s previous pledge to spend 3 per cent of the UK’s GDP on defence by 2030.
