Rishi sunak expected to bring about turnaround in fiscal policy

London Britain has a new head of government – the third in three months. Rishi Sunak has won the race to head the Conservative Party to become the next British prime minister. The 42-year-old former Chancellor of the Exchequer was the only candidate to receive the support of well over 100 Tory MPs in the British House of Commons.

The Tory party had set the 100 mark as a hurdle for all candidates. His last remaining rival, the Conservative majority leader in Parliament, Penny Mordaunt, had shortly before withdrawn her candidacy.

This brings the government crisis in London, which has been going on for weeks, to a further climax. The internal party election had become necessary after the disastrous economic policy false start of the still incumbent Prime Minister Liz Truss. She had resigned as party leader on Thursday after only 44 days in office and will be King Charles III on Tuesday. Ask for her dismissal as prime minister. Shortly thereafter, Sunak can be officially appointed as the new head of government.

The financial markets had already reacted positively to Sunak's looming victory in the run-up to the election result. The pound rose against the U.S. dollar and interest rates, especially on two-year British government bonds, fell. According to analysts, this also reflected relief that ex-Prime Minister Boris Johnson had decided against running for office again.

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Benjamin Nabarro, an economist at Citigroup, a major U.S. bank in London, expects a Sunak-led government to "cement" the turnaround to sounder fiscal policy announced by Treasury Secretary Jeremy Hunt last week, and to "see a further tightening of fiscal policy in the next week."

Shevaun Haviland, head of the British Chambers of Commerce, called for economic uncertainty "to end now". Citibank economist Nabarro, however, is skeptical that the calm after political chaos will last long. "Can a government be formed that has the legitimacy to deal with current economic challenges?" the economist asks, pointing out that "the weekend's political machinations pointed to a divided party".

Labour party calls for new elections

The opposition Labour Party takes a similar view and is calling for immediate elections. Labour leads by more than 30 percentage points over the ruling Tories according to the latest polls. Sunak, however, ruled out new elections in the short term.

Indeed, the economic and political risks for the prime minister-designate are considerable. For starters, Sunak faces a fractured party, with supporters of Boris Johnson still holding a grudge against the former finance minister. Sunak had launched Johnson's case with his resignation in the summer.

"Until we have someone at the top in Parliament who has the support and respect of the parliamentary party, we are effectively ungovernable," Johnson supporter Christopher Chope threatened to the BBC. Sunak, he said, has no mandate from the country, nor from members of the Conservative Party.

Listen to our podcast here: This is what UK correspondent Torsten Riecke says

Although the new prime minister has not spoken publicly in recent weeks, there are already signs of the course he will take. As chancellor of the exchequer, Sunak had led the country on an austerity course with tax increases. This included a public sector pay cap below the double-digit inflation rate.

It will be interesting to see how Sunak and Hunt plan to plug the budget gap of around 40 billion pounds (46 billion euros). Truss had to drop her plan to keep pensions from rising at the rate of inflation, as planned, after opposition among Tories. The new prime minister has already made it clear that for him, reducing the national debt – the debt ratio, after all, is around 100 percent of gross domestic product (GDP) – and the fight against inflation are to take priority over tax relief.

Sunak's last remaining rival pulled out.

"I will never cut taxes in a way that just drives up inflation," Sunak promised in the summer. As Chancellor of the Exchequer, he had also frozen tax allowances for four years, leading to many Britons falling into the so-called "cold progression" of higher tax rates.

Tory majority wants defense spending to rise to three percent by 2030. Defense Minister Ben Wallace threatens to resign if it is tampered with. Sunak has so far refused to promise that publicly because he needs to save money – including on defense.

Northern Ireland dispute: Sunak could take more pragmatic approach

The future course toward the EU could also lead to conflicts with his own party. While Sunak is a top Brexit supporter and, like his predecessor Truss, has announced a radical dismantling of EU rules in the City of London. At issue in particular are the capital rules for insurance companies (Solvency II).

At the same time, he has shown more pragmatism than the right wing of the party in the dispute with Brussels over trade with the Northern Ireland province (Northern Ireland Protocol). "On the Northern Ireland issue, time is of the essence as the incapacitated parliament in Belfast is likely to dissolve on Friday and call new elections," said Tim Bale, politics professor at Queen Mary University in London. Bale expects Sunak to quickly try to reach an agreement with Brussels.

The economic consequences of Brexit could prove to be the biggest challenge for the new head of house at 10 Downing Street, given that three other prime ministers before him have failed to do so since the 2016 referendum. If the Tory party admits its mistake and is led by someone "with the intellectual capacity and authority to renegotiate Brexit, there is an opportunity to turn the economy around, but without that the economy is doomed," warned British investor Guy Hands, chief executive of private equity firm Terra Firma.

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