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Britain's Chancellor of the Exchequer Jeremy Hunt poses with the budget box at Downing Street in London, Britain March 15, 2023.
A new attitude and a new budget: Can the Tories make a comeback?
Weeks after the International Monetary Fund forecast that the UK will be the worst-performing advanced economy this year, British Chancellor Jeremy Hunt on Wednesday handed down a fresh national budget. (Though the independent Office for Budget Responsibility now says that the economy will only contract by 0.2% this year, an improvement on previous forecasts of 1.4%.)
Budgets can have a massive impact on politics. You’ll likely remember that ephemeral PM Liz Truss’ “mini” budget last fall caused the markets to nosedive, leading to her swift resignation.
As the UK grapples with a dire cost-of-living crisis and a sky-high annual inflation rate of 10.1%, Hunt tried to convey that the government will address falling living standards without overspending while also stimulating growth after years of sluggish economic performance. For context, real household disposable income, a key standard-of-living metric, is expected to drop 5.7% between 2022 and 2024.
Indeed, the budget laid out public spending measures opposed by some Tory hardliners, including a £4 billion additional investment in free childcare and an extension until the end of June of a £2,500 annual energy price cap to offset rising energy costs as a result of Russia’s war in Ukraine.
What's more, the Tories will stick to an earlier plan to raise the corporate tax rate by 6 percentage points to 25%, a move unpopular with fiscally conservative Tories. A significant budgetary development is the abolition of limits on the amount workers can build up in their pension funds before paying tax, which is aimed at keeping some professionals in the workforce for longer. There are also some tax breaks offered to businesses to boost investment.
Much of Hunt’s budget focuses on the need to plug a hole in the labor market and boost productivity after years of sluggish growth. Crucially, while the economies of other advanced countries including the US, Canada, Japan, and the EU now exceed their pre-pandemic levels, Britain’s GDP remains stagnant. This trend started after the 2007-2008 financial crisis, and was further exacerbated by the Brexit fallout, which raised trade barriers and created a climate of uncertainty and chaos.
The challenge is now on Labour leader Keir Starmer to recast his party’s opposing message. Love him or hate him, Prime Minister Rishi Sunak, a mild-mannered technocrat who is on a mission to mend relationships around the globe, can hardly be accused of the gross incompetence that plagued his predecessors.
With general elections slated for next year, can Starmer maintain the 20-point advantage Labour currently enjoys after the implosion of the Conservative Party under Boris Johnson – or is this the beginning of the Tories’ comeback?A child takes bath in a bucket to cool off amid a heatwave warning in Hunan province, China.
What We're Watching: Dry China, UK inflation forecast, Pegasus spyware shakeup
Feeling the heat in China
Severe drought coupled with record-high temperatures in central and western China have hampered hydropower generation, prompting the shutdown of factories and sparking rolling blackouts in Sichuan province. (China is the world’s largest producer of hydroelectricity, which accounts for at least 18% of its total electricity generation.) The impact of the scorcher is being felt as far away as Shanghai, which relies heavily on hydropower from Sichuan, a province that usually gets a big summer downpour. Meanwhile, the property sector is drowning in debt, prompting China’s central bank on Monday to cut its five-year interest rate to help the construction and real estate sectors. What’s more, Shanghai announced that it would temporarily turn off lights lining the historic Bund waterfront to conserve energy. The energy crunch will further hurt China’s stagnant economy, which continues to contract as a result of President Xi Jinping’s zero-Covid policy. President Xi is desperate to get the situation under control ahead of the 20th Party Congress later this year, when he is expected to secure a norm-defying third term as CCP secretary-general.
UK’s inflation scare
Brits are feeling the heat this summer, from blistering temperatures earlier this month to ongoing rail worker strikes, disrupted train services, and a deepening cost-of-living crisis. But things could soon get even worse thanks to soaring food and gas prices. On Monday, Citigroup warned it expects consumer price inflation to hit a whopping 18.6% by early 2023 — the country’s highest rate since 1979. This Friday, energy regulator Ofgem will announce the level of its next price cap — the outer limit households pay for home energy costs — with estimates suggesting it could rise to more than £3,500 a year, a 75% increase. Some 10.5 million British households are at risk of fuel poverty this winter as inflation squeezes household income – and raises fears of a recession. Analysts say this dynamic could push the Bank of England to further raise interest rates to rein in inflation. Meanwhile, the leadership race to replace outgoing PM Boris Johnson as Conservative Party leader is nearing its end. Frontrunner Liz Truss – who recently said she would look to change the central bank’s mandate on inflation – has pledged to deliver tax cuts and assistance for UK households grappling with the high energy costs, a pivot from her earlier disapproval of “handouts.” But Rishi Sunak, the former chancellor also gunning for the top job, warns that Truss’s plans could plunge the country into an “inflation spiral.”
Pegasus firm rebrand
NSO Group, the Israeli tech company that developed Pegasus – the controversial spyware that's been sold to some repressive governments in recent years – is undergoing an internal shakeup. CEO and co-founder Shalev Hulio is stepping down, and 100 of its 700 staffers are being let go as the company tries to improve its image after a series of flare-ups that hurt its reputation … and its pocketbook. Governments with questionable human rights records have reportedly used the software to hack journalists, dissidents, and political opponents. The company’s detractors were particularly outraged that the tech was used to spy on the fiancée of journalist Jamal Khashoggi in the months before he was killed. Last year, investors warned the company might default on its debt because of a drop in sales. The revamp is likely part of NSO Group’s bid to get off Washington's blacklist (it’s currently prohibited from accessing American tech) and to boost sales to NATO members.Can Boris Johnson survive?
No world leader has had a more bruising month than British Prime Minister Boris Johnson. Among other recent indiscretions, he’s been accused of flouting lockdown rules, as well as breaking ministerial protocols by using Conservative Party funds to refurbish his personal pad at 11 Downing Street – which analysts say contributed to the Tories losing a safe parliamentary seat for the first time in 200 years.
What are the current crises Johnson is facing, and how might they affect his political survival?
Rules for thee, and not for me. News emerged this week that Johnson’s office organized an outdoor BYOB party for staff in May 2020. At the time, Britons were told to stay home and not to socialize in groups. (The PM offered a poorly-received apology Wednesday, saying that he thought it was a standard “work event.”) Meanwhile, his staff also flouted the rules at Christmas time in 2020, the details of which were revealed in an awkward leaked video.
There’s more. Johnson has been embroiled in a Marie Antoinette-type scandal, having used funds given to the Conservative Party to refurbish his residence (the WhatsApp exchange between the PM and the donor is cringeworthy). Coupled with the fact that one-third of Brits fear their energy bills will be “more expensive than they can afford” this year, this makes for very bad optics — and politics.
Cost of living crisis. But more than the PM’s personal scandals, economic grievances are the driving force of political change. This is extremely relevant amid the ongoing pandemic where many Britons are struggling to meet basic economic needs. Fuel prices are soaring while inflation rates recently reached a 10-year high. Indeed, the rising cost of living is likely to get even worse when a new national insurance tax of 1.25 percent comes into effect in the spring.
While some of these issues — including the energy crunch — are global in scope, food price hikes and supply chain issues have been exacerbated by post-Brexit complications. And things aren’t expected to improve anytime soon. Ominously, one British think tank has dubbed 2022 the “year of the squeeze,” predicting households could lose 1,200 pounds ($1,645) in annual income.
Party infighting. One of the biggest threats to the embattled PM’s political survival is coming from the inside as rival Tory factions are pulling him in opposite directions.
Pro-Brexit MPs and free-traders are furious at Johnson for not lowering taxes, while Tories representing “red-wall” seats — working-class neighborhoods that have traditionally been Labour strongholds but recently become more competitive — want the government to expand the social safety net to help poorer constituents weather the cost-of-living crisis.
What’s more, after a Conservative Party revolt last month revealed the depths of dissatisfaction with the PM, Eurasia Group analyst Mujtaba Rahman now says that Johnson could be ousted after local elections in May so that Tories can pin the deteriorating economic situation and (anticipated) legislative losses directly on the PM.
The very powerful woman in Britain you may have never heard of. Sue Gray, a high-level civil servant, has been tasked with leading the investigation into the ill-fated Downing Street gatherings. Her findings, which should be released in 10 days, will likely reveal more damning details, giving Tories the fodder they need to cast the PM as a liability.
What now? On top of the impending Gray report, the Johnson government will have a number of thorny issues on its agenda in the coming weeks and months, including an ongoing omicron wave as well as negotiations with Brussels over the future of the Irish border.
Johnson, the forever Comeback Kid, would have to manage these challenges impeccably to prevent at least 55 Conservative MPs from triggering a leadership vote. Or is it already too late?
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