Sunak, UK Economy Prepare For Difficult Tests

The good old days when Rishi Sunak was finance minister are practically different from the days awaiting him as prime minister. The UK government seems under pressure to show how it will keep borrowing and how to restore Britain’s fiscal credibility in markets.

With more than two years as finance minister (Feb 2020 to July 2022), Sunak spent heavily to provide a robust shield for households and businesses from economic crisis due to the pandemic. Now, Sunak, who is set to be Britain’s next prime minister will face a more difficult and more different economic test.

UK inflation rate has topped 10 percent, the highest in 40 years and, like many countries, the economy is slowing down and at risk of falling into a recession. The Bank of England is continuing to raise interest rates to contain inflation, and will not purchase government debt because starting next month it is planning to slowly sell its holdings of bonds.

The government will rely more on investors, who have been demanding higher interest rates, than the central bank to buy bonds. Under such circumstances, Sunak has several urgent issues to tackle. One is how to support households squeezed by energy costs, after Russia’s war in Ukraine introduced huge volatility into global energy markets.