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Written by: Hargreaves Lansdown
- Former Chancellor, Rishi Sunak, will become the next UK Prime Minister
- He will replace Liz Truss who resigned as PM on 20 October 2022 after 45 days in office
- Penny Mordaunt pulled out of the leadership race at the last minute
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown:
‘’Gone are the days when Rishi Sunak was prepared to open the government coffers up to see the UK through a crisis. The pandemic spending spree is well and truly over and the former Chancellor will take the top job in the guise of a strict and austere headteacher.
He will be determined not to see the bond market run amok again, threatening the country’s financial stability. He will be revelling in the fact that his curriculum of higher taxes and curtailed spending, which he preached on the campaign trail, is already being followed. However, it’s likely he will take an even harder line now on government budgets, given the punishment threatened to be handed out again comes in the form of much higher government borrowing costs. He will also want to show he is co-operating with the Bank of England by being ultra conservative fiscally in a bid to tame high inflation.
Ties of loyalty to Boris Johnson still run deep though, and Rishi Sunak will find it hard to shake the traitor tag attached at the time of Johnson’s downfall. Garnering support across a divided party for highly unpopular spending cuts will be a hard task. He is likely to stay highly reliant on the hard Brexit wing of the party for support, which is likely to mean that hopes of a softening approach in talk with the EU on trade are likely to be wishful thinking.
Rishi Sunak is set to stay a Brexiteer through and through and is also expected to continue to take a hard line on immigration, despite the struggles of businesses grappling with intense labour shortages. However, there may well be more progress with an Indian free trade agreement, which was put on ice, following a row over student visas. It’s likely he will push hard for a breakthrough, given the dearth of any positive news on the trade front for the UK.
He is also set to style himself as a tech evangelist Prime Minister, given this record in funding tech start-ups while at the Treasury. With his experience as a hedge fund manager and the time he’s spent in California, right in the heart of the big tech industry, he will be expected to give a rocket boost to home grown tech talent. This will be no quick fix though, and new tech listings are likely to still be few and far between in the UK given the risk premium still attached to UK assets. ‘’
No more ‘Santa Sunak’
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown:
“This isn’t the same Rishi Sunak who gave Santa a run for his money during the pandemic. He’s going to have an incredibly tight hold on the purse strings. Jeremy Hunt is likely to stay at Number 11 with his mantra of tough decisions and spending cuts. It means we may not be able to rely on extra help when we’re facing horrific price rises next April.
It was partly Sunak’s commitment to keeping a lid on spending, and higher levels of taxation that persuaded Conservative Party members that there had to be an easier answer during the last leadership election. The short and messy premiership of Liz Truss may well have cemented the opinion that right now there’s no alternative.
Anyone who relies on benefits to make ends meet will be crossing everything that Sunak’s previous commitment to uprate benefits with inflation in April will stand the test of time. However, given that his Chancellor has thrown the uprating into doubt, there are no guarantees at this stage. Those on the lowest incomes have been hit hardest by rocketing prices, so have been left with impossible challenges. If benefits don’t keep pace with inflation in April, this will make life even more impossible. On the other side of the balance, Sunak will be dealing with a divided party, nervous about re-election. It’s going to make it more difficult for him to pass legislation which is going to leave so many voters so much worse off.
Sunak’s previous approach to energy support was the lump sums we’re receiving now. He opted for universal help, but at a far lower level than Truss subsequently introduced. Hunt has pledged more targeted support for those on the lowest incomes from April. This could mean more lump sums, but on a means-tested basis. If the system is developed to offer help to those who need it, this may be enough to help us through a really difficult period. However, if the line is drawn so that average earners are out in the cold, it could be devastating.
At the same time, news emerged over the weekend that Jeremy Hunt is planning to extend the freeze on income tax thresholds into the next parliament. By 2027/28 this is expected to cost taxpayers £5 billion a year more, as millions of people are dragged into paying higher rate tax. It’s an extension of an existing policy brought in by Rishi Sunak, so while it isn’t guaranteed to happen, the change of Prime Minister may not alter any plans already in place.”
Can Sunak bring stability after pension chaos?
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown:
“As we prepare to usher in a new Prime Minister the future of the pension triple lock could once again be called into question. Liz Truss’s protestations that the triple lock would be protected were placed against a backdrop of her Chancellor, Jeremy Hunt refusing to confirm any such thing. Truss has now gone, and if Hunt remains in place the new Prime Minister will be under pressure to confirm whether it stays or goes.
Rishi Sunak has defended the triple lock in the past saying pensioners are a vulnerable group within society and that it should be protected. However, he was the one who took the decision to suspend it last year as the furlough scheme distorted earnings figures. Given the current need to cut back on costs, he may feel he has little choice but to do it again. It will be a tricky decision to take though given rampaging inflation has left many pensioners in severe financial difficulty.
Bringing calm to the gilt markets will be another priority after the mini-budget brought bond market chaos and caused defined benefit pension schemes using liability driven investment to run into difficulties. The Bank of England’s bond buying programme helped stabilise the markets, but Governor Andrew Bailey was quick to point out this support was time limited leading to concerns within the industry that gilt yields could spike again causing further upheaval. With the medium-term fiscal plan and the crucial OBR report looming, Sunak will be mindful not to cause another gilt market horror show.”