United Kingdom: this is the economy that Boris Johnson will leave to his successor

First modification: 07/07/2022 – 18:36

Prime Minister Boris Johnson’s resignation announcement deepens uncertainty over the British economy, which is already under pressure from near-double-digit inflation, the risk of a recession and an incomplete Brexit.

Although the race to replace Johnson could take weeks, whoever aspires to succeed him will have a series of no easy tasks on their shoulders to get their ailing finances afloat.

Sterling is near two-year lows against the dollar and the Bank of England is in a dilemma over whether to raise interest rates without hurting economic activity. But the problems go further.

Highest inflation in 40 years

Even more than other countries in the region, Britain is feeling the brunt of an inflation rate that hit a 40-year high of 9.1% year-on-year in May. The Central Bank believes that it will even exceed 11% by the end of this year.

The International Monetary Fund said in April that Britain would face more persistent inflation and slower growth than any other major economy in 2023.

In terms of unemployment, the headline rate increased for the first time since the end of 2020 in the three months ending in April, standing at 3.8%.

Fiscal policy will be key in the next government

One of the reasons given by the former Finance Minister, Rishi Sunak, for resigning last Tuesday, July 5, had to do precisely with the fact that his approach to managing the economy was “very different” from that of Boris Johnson.

Indeed, as the prime minister has been pushing for more tax cuts for months, Sunak’s short-term priority was to ease Britain’s debt burden, which is now over $2.4 trillion after the coronavirus pandemic.

The Office of Budget Responsibility seems to agree with the former minister’s approach: this Thursday he assured that the debt could more than triple to almost 320% of GDP in 50 years if future governments do not tighten their fiscal policy.

Britain’s budget setter favors raising taxes to finance the rising costs of high debt and an increasingly aging population exiting the labor market.

It is also important to seek more sources of resources in view of the entry into force in 2030 of the ban on the sale of new gasoline and diesel cars, since tariffs on fuel are precisely a great source of tax revenue, while electricity is taxed more lightly.

The weight of an unfinished Brexit

More than six years after Britain voted to leave the European Union – and two and a half years after it became effective – London and Brussels are still working out the trade rules that will govern them from now on.

Boris Johnson has insisted on rewriting the rules agreed in 2019 for trade involving Northern Ireland, which is part of the United Kingdom, and the Republic of Ireland, which belongs to the community bloc.

After the announcement of the resignation of the ‘tori’, the Irish Prime Minister, Micheál Martin, took the opportunity to ask the Government of London to abandon “unilateral actions” and resume the diplomatic path in its contacts on Brexit with Dublin and Brussels.

With Reuters, AP and EFE