The daunting challenges facing the next UK prime minister


Boris Johnson briefly chaired a crisis meeting with energy companies on Thursday as a riposte to claims that he is leading a “zombie government”, but all big decisions have been put on hold until a new UK prime minister is in place.

Civil servants may be working behind the scenes on policy options for the new prime minister when he or she takes office on September 5, but Johnson has accepted the convention that big fiscal and policy decisions must be left to his successor.

With an economic crisis building during this hiatus, whether it is Liz Truss or Rishi Sunak who walks into 10 Downing Street next month, they will have a daunting in-tray. Their political honeymoon could be short.

Cost of living

By far the biggest immediate problem is how to ease the crushing squeeze on household incomes caused by inflation and the apparently inexorable rise of domestic energy bills to £4,000 a year or more.

Sunak has accepted the need to expand direct support for the most vulnerable by billions of pounds. He has yet to say how big the package should be or exactly how much extra borrowing will be required.

Truss has promised an emergency Budget in September with tax cuts. That would include a reversal of Sunak’s 1.25 percentage point national insurance rise, but this would offer only £59 to someone on the national minimum wage.

Economists say that other tax cuts, for example on income tax or VAT, would also fail to target the most needy. Truss said this week that she would do “all she can” to help the most vulnerable: it will be a major early test of her priorities.

Windfall tax

New chancellor Nadhim Zahawi is drawing up a list of options to tackle the economic crisis to present to the new prime minister, including going beyond the £5bn windfall tax on oil and gas producers introduced by Sunak.

The former chancellor previously proposed a new £3bn-£4bn levy on electricity generators, and Zahawi has kept it on the table. There is also pressure to extract more from oil and gas producers by cutting back investment allowances.

Truss opposes windfall taxes. Kwasi Kwarteng, business secretary and potentially her new chancellor, is also opposed. But the political pressure from opposition parties to impose heavier windfall levies will be huge.

Bank of England

Whoever becomes the next prime minister will immediately find themselves in a fight with Andrew Bailey, the BoE governor, in a row that could unsettle markets at a perilous time.

Truss’s supporters have accused the central bank of being too slow to put up interest rates, and the foreign secretary has said she will review the bank’s mandate. It is unclear what changes, if any, she will actually make.

Meanwhile, both Truss and Sunak want to give ministers the power to review decisions by regulators “in the public interest” if they feel that the watchdogs are not being rigorous enough in rewriting EU rules.

Bailey is insisting on regulatory independence, arguing that political interference could undermine investor confidence and make the City of London less competitive.

Brexit

Both candidates have promised to embrace the “opportunities of Brexit”, with Sunak vowing to “keep Brexit safe” by reviewing all retained EU law within 100 days with a view to scrapping some of it.

The problem with any bonfire of EU red tape is that the more Britain diverges from the EU rule book, the more friction arises at the border, including on trade between Great Britain and Northern Ireland.

Both candidates have vowed to enact the Northern Ireland protocol bill, which would rip up part of Johnson’s Brexit deal, arguing that it is essential to help restore Northern Ireland’s power-sharing executive in Stormont.

However, unless the new prime minister backs away from unilateral action, the EU will retaliate by cutting British scientists out of Horizon, the world’s largest research programme, and could eventually trigger a trade war.

Overseas aid

The UK overseas aid programme has been thrown into chaos after the government blocked “non-essential” new payments for the rest of the summer over concerns that Ukraine relief work will breach a spending cap.

The new PM will have to allow spending to exceed the “temporary” 0.5 per cent of GDP spending cap — a Tory manifesto pledge of 0.7 per cent of GDP was scrapped — or put aid projects in the developing world at risk.

Cutting overseas aid is popular with many voters, as well as Conservative members, but risks further alienating “soft” Tory voters, particularly young graduates and professionals in marginal seats.

Internet regulation

The future of the sprawling Online Safety Bill is one of the most complex dilemmas facing the new prime minister after detailed consideration of the legislation was booted into the autumn.

The bill would crack down on “legal but harmful” material, and Truss is anxious about its impact on free speech but has also expressed concerns about the kind of material that might be seen by her teenage daughters. Her principle is that the same rules should apply online as apply in the real world.

Sunak has also been equivocal, also talking about the “horrific” material that his own children might see online.

“The ‘legal but harmful’ bit is something I would want to spend some time as prime minister going over and making sure that we’re getting that bit exactly right,” he said.



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