The UK’s long-term debt trajectory also looks unsustainable. This is due to several factors: such as weak demographics, the health needs of an aging population and changes in energy use & costs.3
Though for all the talk of the UK running up debts, it is important to remember that a sovereign balance sheet is different from a private sector one. Sunak has been talking about a 90% debt/GDP level being a limit – but this is based on very flawed research and ignores the notable exceptions.4 In reality, nobody knows what the true debt loading a country can bear but in cases like the UK it does mean a higher debt load can be run and may even be desirable if the money is put to long term productive purposes such as building new infrastructure.
Key amongst these would be the need for energy which is greatly underestimated.5 Regardless of your view of climate change, the problems with the Ukraine have highlighted the need for cheap and reliable domestic energy sources independent of authoritarian, unstable and unreliable regimes. In small steps we have started to make moves towards this, but a lot more needs to be done.
And now the good…
For all the doom and gloom the UK has many things going for it. It has a flexible and educated workforce, fantastic research universities, fast-growing technology clusters and deep liquid capital markets. Importantly, venture capital and a culture of entrepreneurism are on the rise both financially but also culturally. Nurturing and growing this area of the economy is crucial for future success.
Whilst it lacks the resources of the United States it also has the benefits of being smaller and nimbler – an important feature in a fast-changing world.
The UK also needs to viewed relative to its close peers. It has better demographics than Germany, Japan, China or Italy. The UK avoided joining the Euro – possibly one of the best financial decisions made in recent years, as current events are once again demonstrating.
The UK has also started to extract itself from the financial morass that is fast enveloping the Eurozone. Outside of banking circles it is not commonly understood just how vast the debts of the EU itself are.6 Even more incredible, these are in addition to the high debt burdens of many of the countries themselves.
Given the limitations of a shared currency this either means very high and sustained inflation for years, with all the political instability that brings. Or the short but painful option of a major financial disaster and possible sovereign default. How the EU resolves this mess remains a cause for concern.7
And in the blue corner…
If I explain why I don’t think Sunak is the right choice, then it makes clearer why Truss might be a better one by default, though I make this suggestion without much enthusiasm.
Sunak – form over substance?
Much is made of Sunak’s business ‘experience’ but like his track record in office it doesn’t hold up to close examination.
Sunak never advanced beyond a very junior grade at Goldman Sachs, before then spending another two years back in university doing his MBA. He then moved onto a hedge fund where allegedly he advanced to the nebulous title of partner. Despite this alleged success, he briefly moved onto another fund which didn’t appear to work out before then managing investments for his father-in-law and finally then into politics.
In City terms, this really doesn’t amount to much. More importantly, his inability to stay anywhere for any real period and progress internally is a classic red flag for hiring.
As a politician it is tempting to write Sunak off as a well packaged version of the same brand of ideology ‘lite’ managerialism that started to emerge under Major, accelerated under New Labour and reached its peak under Cameron. In common with these two he may present well but his record suggests he is both politically and economically incompetent.
As I explained in my last note, I thought the budget was one of the most incoherent I have ever seen. This is due to the logic of tightening of fiscal policy just as the economy was recovering from the biggest shock in 300 years, and at the same time the Bank of England was finally starting the tighten monetary policy. This was all in the face of a cost-of-living shock caused by external factors.
Then there was the thoughtlessness of the tax rises, in particular the rise in corporation tax, key to economic growth of new businesses, and rise in National Insurance which also broke a manifesto promise.
Combined with the freezing of personal allowances for 5 years, in a world of 11% inflation, it remains extremely unclear what he was trying to achieve other than making people poorer and damaging a recovering economy. As I have already pointed out the UK’s national balance sheet operates differently to a private sector one and the current debt load is lower than levels seen in the past.
As Churchill long ago commented you cannot tax yourself into prosperity, the economy needs to grow.
Politically, he also appears inept. The prime example of this is how he thought it was remotely appropriate for the wife of the Chancellor of the Exchequer to be using a non-domicile tax status to avoid tax. His reaction was all wrong as he appeared more concerned that it had been leaked rather than the ethics of the act itself. He should have left office.
Rather than any clear strategic vision for the UK, Sunak appears obsessed with power for power’s sake. His leadership campaign seems to have started the day he became Chancellor, with a personal media team and the crass PR campaign, such as applying his signature applied to government policy.