If Boris Johnson secures a place on the final ballot to be Tory leader and party members make him prime minister again, the recently suntanned MP for Uxbridge and South Ruislip will find himself in a situation that is unrecognisable from the post-Brexit, pre-pandemic era that marked the high point of his three years and 44 days in No 10.
In January 2020, Britain was poised to benefit from pent-up demand, especially from the business community, held back by four years of uncertainty about the UK’s relationship with the European Union.
After 10 years of austerity, there was money to level up the regions and improve public services. Whoever takes the reins in Downing Street next week will be confronted by a very different economic outlook.
Liz Truss’s flawed mini-budget has made a difficult situation – coming out of the pandemic, and coping with the fallout from Brexit and the Russian invasion of Ukraine – even more difficult. All European countries face similar challenges, but none of the major economies – not France, Italy, Germany or Spain – have poured oil on the flames in the way Truss and her chancellor Kwasi Kwarteng managed to do.
It’s why the markets, which see themselves as guardians of investor funds, have taken fright. Under most circumstances, City institutions work to a simple set of rules. One of the most basic shows how well placed a country is to pay the interest on its debts. Like a mortgage provider, markets lay down rules about what countries should and should not do as the price of a loan, but don’t much care as long as the interest is paid every month.
Only when there are reports that all is not well do they shine a spotlight and warn investors to be wary, as the credit ratings agency Moody’s did on Friday night. Moody’s, like all the other ratings agencies, has put the UK on negative watch, which is a way of saying that Britain will need to pay a higher interest rate on its loans until the economic and political situation improves.
Even if he buries his urge to reboot spending plans from those heady days in 2019 and early 2020, it is clear that Johnson lacks the skills to implement policies, and is the incarnation of political instability.
There are Tory grandees who want to resist pressure to put back Jeremy Hunt’s budget on 31 October to November or even December – as many, including the Institute for Fiscal Studies (IFS), have advanced – because they want to tie Johnson’s hands should he grab the levers of power. If Rishi Sunak and Penny Mordaunt are the only names on the ballot, Tory MPs are likely to accept a delay, knowing that markets will relax a little and the Treasury can expect to pay less on its £2.4tn of borrowing.
Bond yields, which are a proxy for the interest rate paid on government debt, rose when Tory MPs sympathetic to a Johnson bid for power said last week they would nominate him. And no wonder when the most recent forecasts show the Treasury is on course to borrow double the £99bn it was expected to need when the Office for Budget Responsibility, made its last estimates in March.
Higher borrowing costs, higher mortgage costs and higher inflation next year after much of the energy price guarantee is scrapped – all make for a situation that is beyond Johnson’s skills. Sunak, for all his experience in the City as a hedge fund manager, will also struggle to handle the same problems, to which we can add continuing fallout from Brexit, rising unemployment and looming public sector strikes.
The markets may appreciate Sunak’s ability to add up, but there are few tools available to him that can overcome the mess Truss has left. He is expected to keep Hunt in No 11 to see through a severe squeeze on public sector spending allied to selective tax rises, neither of which are vote winners.