Insight
Prime Minister Rishi Sunak plans to fix the economy - how?
'He is walking into something that looks like a bit of a disaster zone': ITV News Economics Editor Joel Hills reports on Rishi Sunak preparing to enter Downing Street amid deepening economic gloom
Rishi Sunak argues the UK is facing a "profound economic crisis".
He takes power at a time when inflation is stubbornly high, interest rates are rising, the economy looks like it’s in recession and the country’s finances look messy.
As prime minister - our third this year - Sunak says he will "fix" these problems. He has yet to spell out precisely how he’ll do this but the market reaction to his victory makes his task a little easier.
Bond yields fell again today, back to levels last seen before Liz Truss’s calamitous Mini-Budget.
Investors’ expectations of how high the Bank of England will increase interest rates also eased slightly.
Lower borrowing costs will save the government billions of pounds but there is still a hole in the public finances.
As it stands, we’ll find out how big the hole is and how it will be filled, when the Medium Term Fiscal Plan is published a week today.
Rishi Sunak’s chancellor - almost certainly Jeremy Hunt but not yet confirmed - will likely have to find around £30 billion of spending cuts or extra revenue, if they are to honour the commitment to get national debt falling as a share of national income in three years time.
Of course, that fiscal rule could be changed to make the target easier to hit but doing so at a time of market volatility and intense scrutiny runs the risk of unnerving investors all over again.
One "cost" of Liz Truss’s disastrous economic strategy is room for manoeuvre is limited.
What do words like gilt and bond mean?
What is a gilt?
What is a gilt?
Gilts are essentially loans given to the government, also known as government bonds.
The government sells gilts to raise money for their spending plans. In return, investors who buy these gilts are paid interest each year until it is time for the government to repay investors in full.
For example, if an investor buys a gilt for £100,000 at an agreed rate of interest of, say, 5% over ten years, then the investor will get 5% of £100,000 (which amounts to £5,000) each year (or over another agreed period of time) until it is time for the government to give back £100,000.
The deadline for the government to repay is known as the maturity rate.
What is a bond? And what is a yield?
What is a bond? And what is a yield?
The yield of a bond is, simply put, the amount of money an investor receives for buying that bond.
Bonds are loans to the government – also known as gilts, as explained above – and the money the investor makes from the bond depends on the yield.
The yield is essentially the interest paid for the bond.
If an investor loans the government £100,000, this amount will be paid back in full at an agreed date in the future. In the meantime, the investor is paid interest on that loan at an agreed rate.
For example, if the interest is 2% then the investor would be paid £2,000 at the end of each agreed period – which could be a year. This is what the bond yield is.
Higher bond yields may indicate investors are reluctant to buy bonds.
What is inflation?
What is inflation?
Inflation represents the change in price level over a year.
Each month, the Office for National Statistics checks the prices of a range of items in a ‘basket’ of goods and services.
They look at the cost of more than 700 things people regularly buy, including everyday things like a loaf of bread and a bus ticket and larger ones, like a car or holiday.
To calculate the rate of inflation, they compare the cost of the basket with what it was a year ago. The change in the price level over the year is the rate of inflation.
The UK government needs to borrow money and Rishi Sunak needs to persuade lenders that, after a moment of wackiness, the UK is credible again.
If in doubt, his temptation will be to err on the side of austerity.
Finding £30 billion, if that is the scale of the challenge, will not be straightforward. Public services are under enormous strain, raising taxes will leave households and businesses feeling worse off.
Difficult, unpopular decisions lie ahead and the stakes are high. The outlook in the short term is awful and history tells us that governments which can’t raise living standards run into problems.
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