Boris Johnson is handing his successor an economic “catastrophe”

Across the UK, businesses and families are warning that they won’t be able to get through the winter without government help. This creates enormous challenges for the new prime minister, who will be announced this week.

For months, the UK has suffered from a leadership vacuum as the country has slipped into recession and a humanitarian crisis triggered by soaring energy bills.

Since Boris Johnson announced he would step down in July, growth prospects have weakened. Annual inflation is above 10% with the jump in food and fuel prices.

Frustration over the rising cost of living has forced hundreds of thousands of port, train and postal workers to go on strike. The pound sterling has just recorded its worst month since the 2016 Brexit referendum, hitting its lowest level against the US dollar in more than two years.

“It’s just one blow after another,” said Martin McTague, who heads the UK Federation of Small Businesses. “I’m afraid I can’t find any good news.”

The situation can get much worse before it gets better. The Bank of England predicts that inflation will jump to 13% as the energy crisis intensifies. Citigroup estimates UK inflation could reach 18% by early 2023, while Goldman Sachs warns it could reach 22% if natural gas prices “continue to be high at current levels”.

Johnson’s succession candidates — current Foreign Secretary Liz Truss and former finance minister Rishi Sunak — face calls to announce a dramatic intervention once one of them becomes the country’s fourth Conservative leader in a decade.

The most pressing problem will be dealing with the skyrocketing cost of energy, which could trigger a wave of business closures and force millions of people to choose between putting food on the table and heating their homes this winter. Experts have warned that people will be left helpless and deaths in the cold will rise unless something is done quickly.

“Everyone is assuming there will be a quick and decisive announcement that puts this issue to bed, or at least gives people security,” said Jonathan Neame, who runs Shepherd Neame, Britain’s oldest brewery. “If there isn’t, that person will be under very considerable pressure.”

An energy “catastrophe”

Home energy bills will increase by 80% to an average of £3,549 ($4,106) a year from October. Analysts say the domestic price cap could rise to above £5,000 ($5,785) in January and exceed £6,000 in April ($6,942).

As people are forced to reassess their budgets, the boom in consumption that followed the Covid-19 lockdowns is rapidly dissipating. The Bank of England has warned that the UK economy will enter a recession in the coming months.

“The main challenge that rising energy prices poses is that households that use a lot of energy – and in particular the poorest households – are really going to struggle to survive,” said Ben Zaranko, senior research economist at the Institute for Fiscal Studies. “That will mean really big cuts in other areas of spending.”

Meanwhile, Neame, whose portfolio includes about 300 pubs in southern England, said business owners were panicking. They’re getting insane quotes for next year’s utility bills, if they can find providers at all. Nick Mackenzie, head of the Greene King pub chain, said one place he works with reports that its energy costs have increased by £33,000 ($38,167) a year.

“It’s really scary for a lot of companies, especially those that went through Covid in a weakened state,” McTague said. “They are now struggling to deal with another once-in-a-lifetime catastrophe.”

The devaluation of the British pound could exacerbate the problems, making it more expensive to import energy and other goods, further driving up inflation.

overlapping crises

It’s not the only reason that entrepreneurs and investors are increasingly anxious. While job openings fell between May and July, they remain 60% above their pre-pandemic level. Finding workers to fill open positions has been a particular challenge in the UK since the country voted to leave the European Union. Around 317,000 fewer EU citizens lived in the UK in 2021 than in 2019, according to the Office for National Statistics.

Brexit is also disrupting trade, particularly with the European Union, the UK’s biggest trading partner. Exports and imports will be around 15% lower in the long run than they would have been if the UK remained in the EU, the Office for Budget Responsibility has projected.

Dean Turner, a British economist at UBS, said it was up to the new prime minister to try to make the most of the country’s position without creating further disruption. However, radical British lawmakers are still pushing to set aside an important part of the Brexit deal Johnson signed with the European Union, which could spark a trade war with Britain’s biggest export market.

“Brexit happened. It is what it is, we all have our own opinions about it,” Turner said. “But we have to work with it to make it better for us, and I just struggle to see if there’s any momentum to do that.”

no easy solutions

Truss, who is expected to take the reins from Johnson after his government collapsed under a pile of scandals earlier this summer, has vowed to boost the economy by cutting taxes. But many economists fear this approach could increase inflation and damage fragile public finances, while failing to put money in the pockets of those who need it most.

“The benefits of cutting [impostos] would largely flow to the people who pay the most taxes, who are usually people with the most money,” said Jonathan Marshall, senior economist at the Resolution Foundation.

There is no way for the state to avoid paying large sums to deal with the energy situation this winter, but targeted measures will be needed to prevent waste. Freezing gas and electricity prices over the next two winters could cost the government more than 100 billion pounds ($116 billion), according to researchers at the Institute for Government.

“Energy is expensive, gas is expensive,” Marshall said. “To prevent people from freezing in their homes, this needs to be paid for. But the state doesn’t have to pay for it to the people who can afford it.”

There are also questions about how the new government will afford large-scale economic intervention, especially if cutting taxes – and therefore government revenue – is the priority.

The UK government has borrowed heavily to provide support during the coronavirus lockdowns. The country’s debts are now almost 100% of its gross domestic product. When interest rates were at rock bottom and access to money was cheap, this was not a major issue.

But that is no longer the case. The Bank of England has been aggressively raising rates as it tries to contain inflation. This will make it increasingly expensive for the government to service its debt. The UK has also issued a large number of inflation-linked bonds, increasing its vulnerability.

“It’s almost a perfect cocktail of challenges that make public finances look at risk in a way they haven’t in recent times,” said IFS’ Zaranko.