All the smart money is on Liz Truss winning the race, although in hindsight it can be seen as a Pyrrhic victory because the new prime minister will come to power with the economy hitting the wall, energy bills soaring, pound collapses and global financial markets sell off. In more normal times, NHS waiting lists and the prospect of hospitals being overwhelmed by an outbreak of winter flu or a new strain of Covid-19 would be the incoming government’s top priority. In the coming weeks, however, there should be one priority and one priority only – and that is to avoid financial collapse. Throughout the seemingly endless Tory leadership campaign, Truss has radiated positivity, but the time to step up is over. October’s rise in fuel bills is less than a month away and will make households much worse off. Last week, the Resolution Foundation said the impact of higher energy costs would wipe out 5% of household energy consumption this year and a further 6% next – together the steepest fall in living standards in at least a century. The prospect of mass impoverishment leads to a sell-off in the pound. While it’s true that currencies generally fall against the US dollar, sterling’s fall has been sharper than most. The pound closed last week at around $1.15 against the dollar and looks set to fall further. Further bad economic news – of which there is likely to be plenty – could see sterling rapidly move towards parity with the US currency. The fall in the pound increases inflation making imports more expensive. International events are also conspiring to make life difficult for the new prime minister. Veteran investor Jeremy Grantham said last week that the world was entering the final days of a super-bubble before a monster financial crash, exacerbated by deliberate efforts by the Federal Reserve and other central banks to curb inflation. “The current super bubble is characterized by an unprecedentedly dangerous mix of asset overvaluation (with bonds, housing and stocks all critically overvalued and now rapidly losing momentum), commodity shocks and Fed aggressiveness. Every cycle is different and unique – but every historical parallel suggests the worst is yet to come.” Time will not be on the new prime minister’s side because the deadline for the next election is just over two years away. It’s possible that the worst period of stagflation – a recession combined with rapid price growth – will be over by 2024, but it’s starting to look awfully tight. There is already speculation, on both the left and the right, that Truss may call a snap election on the basis that the economy is rapidly heading south and a mandate is needed to straighten things out. In this respect, it faces the dilemma Gordon Brown faced in the autumn of 2007, when the financial crisis was in its early stages: the situation is not great, but it might be as good as it gets for a while. In contrast, politicians who have spent their entire careers rising to the top find it difficult to take the risk of quickly losing power when there is no need to do so. In fact, it does not make much difference whether early elections are held or not, because the strategy should be the same in both cases. Tras’s premiership is likely to be determined by decisions made in the first few weeks of her term. The pretense that Britain’s problems can be easily solved must be abandoned. The cost of living crisis is as serious a threat to the economy as the pandemic and it is time to put the country on an economic war footing. In the spring of 2020, the government borrowed heavily to finance the license and its various support packages for businesses. Sunak, then chancellor, decided that keeping the economy afloat was more important than balancing the books, and he was right to do so. Once again, the government needs to spend fast and spend big, even if it means adding tens of billions of pounds to public borrowing, Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. The extraordinary budget that the Ministry of Finance is preparing for the new government must be fully utilized. Officials believe the Truss will insist on pushing ahead with its plans for tax cuts, but also assume the new prime minister will want to provide more direct support to consumers and businesses. Truss and her new chancellor – expected to be current business secretary Kwasi Kwarteng – must choose carefully from a menu of options, combining some universal support with help more targeted at households in greatest need. Not all the things that need to be done can be done quickly, so there will need to be a second set of full budget announcements later in the fall. This month’s mini-budget should provide some idea of the likely direction of travel, including a commitment to improving Britain’s woefully inadequate home insulation and boosting energy security. The stark truth is that it is already too late to prevent a recession brewing this winter. However, it’s not too late for Truss (or Sunak) to ensure he’s on the milder end of the spectrum.
