Sunaks fiscal policy unpacked by Truss economic guru Big positives

Rishi Sunak: Economist outlines 'positives' of his fiscal policy

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Julian Jessop, a fellow at the IEA free-market think tank, has pointed to stability both in market and political terms as a major benefit of a Rishi Sunak-led Government taking power. The economist does also however express considerable doubts about the former Chancellor’s long-term strategy for the UK economy amid concern that the Conservative frontrunner will adopt a plan akin to “austerity 2.0.”

Mr Jessop told Times Radio: “Two big positives, one is assuming it is Rishi Sunak – and I think that’s correct, we will now get a period of political stability that we desperately need.

“Secondly, related to that we will also get a period of stability in the markets, it’s interesting that expectations for interest rate increases from the Bank of England have already fallen quite sharply and that’s the key to getting mortgage rates down again.

“So in the short term, this is clearly good news.”

The economist went on to warn that he still harboured concerns that Mr Sunak’s economic strategy could fail to break the “doom loop” of higher taxes and spending cuts which would leave the UK with a “worse outlook.”

He added: “I do still have concerns about the direction of policy, others have already talked about this, but it does look like we might end up both with tighter monetary policy but also tighter fiscal policy, austerity 2.0.

“So I think there’s a risk that we’re stuck in the old doom loop of tax increases, spending cuts, weaker growth, and actually worse off outlook for the public finances than we would otherwise have had.”

Sterling strengthened on Monday finding short-term relief from the likelihood that former finance minister would become Britain’s next prime minister after Boris Johnson quit the race.

The pound was an outlier among major currencies as most others weakened against the US dollar. It rose as far as $1.1402 in Asian trading before paring gains to hold just inside positive territory at $1.1323.

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Sterling’s moves against the euro were sharper with the common currency falling 0.5 percent to 86.84 pence.

Sunak, who has the backing of around 150 lawmakers, could be named leader as soon as Monday to replace Liz Truss, becoming Britain’s third prime minister in less than two months.

Former prime minister Boris Johnson had raced home from a holiday to see if he could enter the ballot.

However, he said on Sunday that while he had secured sufficient support to proceed to a vote by Conservative Party members, he realised that he could not govern effectively “unless you have a united party in parliament.”

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Markets initially welcomed the news, with British government bonds also rising with the pound but struggling to hold on to the gains.

“We maybe have a bit less chaos with Boris Johnson not running but it’s not like Rishi Sunak has a strong programme presenting greater horizons ahead for the UK economy when the backdrop is still the backdrop,” said John Hardy head of FX strategy at Saxo Bank.

Hardy said he didn’t see a return of the “chaos” that sent the pound to a record low of $1.0327 on September 26 and caused a spike in euro/ sterling as the Bank of England and the government would send the right signals.

He added: “But I just don’t see a strong steady improvement.”

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