Can Sunak steer economy through ‘profound crisis’?

Rishi Sunak enters number 10 today, having made very few promises and said very little in this leadership campaign.

He has experience of “profound economic challenges” having steered the economic response to the pandemic lockdown and created the furlough scheme from scratch – the government-funded subsidy to the wages of 11million British workers.

The country has faced massive unemployment and a possible depression due to the impact of Covid. His team at Treasury and HMRC turned furlough and self-employment schemes incredibly quickly, helping to keep unemployment at a record low when it was expected to hit double digits.

But what Mr Sunak is now facing is a different kind of challenge, one in which he is being forced to “do whatever it takes” as he famously said during the pandemic.

A little over a year ago, he privately warned that a bout of inflation was coming from the aftermath of the pandemic. What we have now is generational high inflation, high debt, low growth and the need to fully regain lost market credibility.

His appointment has already reassured markets, with the government’s effective lending rates now returning to levels seen immediately after the mini-budget. If this continues, it could impact the entire economy and limit the rise in mortgage and business borrowing costs.

And it could save billions from the government’s mounting interest bill.

However, he must provide a set of sober, credible loan numbers that require either tax hikes or spending cuts, which will be announced on Monday. The magnitude of these decisions will prove to be a major test of party unity.

Earlier this year, Chancellor Sunak backed both an increase in social security and an increase in the value of taxes and benefits in line with the current 10% inflation rate.

Unlike during the pandemic, the Bank of England will not buy government debt and will keep borrowing costs low. In fact, they plan the opposite and raise interest rates.

While the widespread assumption is that he will continue with Jeremy Hunt as chancellor, the decision on who fills number 11 will reveal a lot about how the new prime minister will run his government. Will he delegate big economic decisions, or will he effectively be his own chancellor?

And then there is the great structural challenge. Without a popular mandate of his own, he will rely on the 2019 Tory Manifesto. But in the wake of the pandemic and energy crisis, the priorities of three years ago may not be fully reconciled with the immediate hard decisions required now.