The man most likely to lose the fight to become Conservative leader is threatening dire consequences if he is disappointed. Pointing to volatile financial markets, Rishi Sunak warned this week that investors will dump British assets if Liz Truss becomes prime minister and then borrows tens of billions to give away. Pressing ahead with tax cuts and public spending while ignoring the risk of an investors’ revolt is, says the former chancellor, “complacent and irresponsible”.
A degree of rhetorical licence is granted to electoral combatants, and Mr Sunak has enjoyed his full quota this summer. The once mild-mannered MP has spotted a dangerous “lefty woke culture” from which only he can protect “our history, our values, our women”. Indeed, the further behind he has fallen, the more extreme the vows for what he will do if he wins. But even the boy who cried wolf called it right once, and this latest claim will undoubtedly be taken more seriously. After all, its author once worked in the City for those money managers he sees as so jittery.
What’s more, on one measure confidence in British assets is falling. If the UK government wants a two-year loan, markets are currently demanding an interest rate of about 3%, the highest since 2008. That is about one percentage point above what they would ask from Rome and almost two whole percentage points up on Berlin.
Yet Mr Sunak is playing fast and loose with both evidence and explanation. While the hot-money speculators may be betting against the UK, the rate on a 10-year government loan remains low at about 2.7%. In other words, investors are pessimistic about the long-term outlook for the UK. Our energy shock has been larger than for many of our European neighbours and our inflation rate is among the highest of the big rich countries. Like her rival, Ms Truss has also spent the summer writing cheques that she has no plans to cash. Pension fund managers are hardly accepting her every pledge and promise as gospel. What is true is that the country’s political and economic position looks seriously fractured and fractious.
In Westminster, the governing party has spent months at war with itself. The most likely next prime minister has gone out of her way to pick fights with the leaders of Scotland, Wales and Northern Ireland. And the UK is embroiled in a forever row with the EU, its single biggest trading partner. Amid such sclerotic government, there has been no major attempt to deal with the cost of living crisis.
However solipsistic our battles, however parochial our terms of argument, investors do notice such episodes – just look at how the value of sterling dived after Northern Rock and again after the Brexit referendum.
Soon, the shock value of a City bank predicting 20% inflation will die away – and what will be left is the realisation that very high prices are here to stay. The Bank of England and most other forecasters expect price rises to tail off, but that doesn’t mean prices will fall. Both main parties should stop looking at this cost of living crisis as a temporary phase to be fended off with a giveaway here and a price cut there. They should prepare instead for years in which energy, food and rent are seriously expensive. The threats the UK faces are real, not rhetorical. They demand some reality from our politicians.