Britain’s Conservative government faces a morass of problems, some new, others longstanding, that are stymying Prime Minister Rishi Sunak.
Prime Minister Rishi Sunak hopes to hold onto power by selling himself as the repairman for a broken Britain. On Wednesday, he got a faint sign that the repair work was gaining traction: the government announced that Britain’s inflation rate in June was 7.9 percent, a decline from the previous month.
But the rate is still higher than that of Britain’s European neighbors and more than twice that of the United States. And it is just one of a morass of economic problems — from spiraling debt to labor shortages to sputtering growth — that are stymying Mr. Sunak as he makes the case that his Conservative Party, in government for the past 13 years, deserves to stay there after an election that he must call by January 2025.
The Conservatives will face an early test of their political fortunes on Thursday, with three by-elections, special elections to fill seats in Parliament vacated by Tory lawmakers. The party is girding itself for a long day.
“They’re running out of runway,” said Tim Bale, a professor of politics at Queen Mary University of London. “These by-elections are likely to be a referendum on the government, and they could lose all three.”
Mr. Sunak, a former chancellor of the Exchequer who once worked at Goldman Sachs, has cultivated a reputation as a technocrat and problem solver. He has thrown off the supply-side ideological experimentation of his predecessor, Liz Truss, and the have-your-cake-and-eat-it style of her predecessor, Boris Johnson.
But Mr. Sunak’s return to fiscal prudence has yet to reinvigorate Britain’s growth. On the contrary, inflation is forcing the Bank of England to hike interest rates aggressively to avert a wage-price spiral. The tight-money policy threatens to tip the economy, already stagnant, into recession. And it is inflicting pain on millions of Britons who face soaring rents and higher rates on their mortgages.
Inflation, economists agree, is likely to continue to drop in the next six months, perhaps even enough to meet Mr. Sunak’s goal of halving the rate to 5.2 percent by year-end. But Britain’s other problems — anemic growth, low productivity, a labor shortage, and a crumbling National Health Service — are not likely to be fixed in time for him to claim a full turnaround before he faces the voters.
“Low productivity and low growth make economic policy challenging,” said Mahmood Pradhan, head of global macro economics at Amundi, an asset manager. “It reduces fiscal space. It’s a very tight straitjacket to be in.”
With deteriorating public finances, Mr. Sunak can neither spend heavily to raise wages for striking doctors or railway workers, nor can he offer tax cuts to voters. At things stand, he is already at risk of missing another of his five pledges: to reduce national debt. Government debt has risen to more 100 percent of gross domestic product for the first time since 1961, according to the latest data.
For two years, the government has frozen the income brackets for personal income taxes rather than raising them with inflation, driving up the effective rates. As a result, Mr. Sunak finds himself in an awkward paradox: a free-market Conservative heading into an election with a government that is imposing the greatest tax burden on the electorate since World War II.
Critics argue he has no one to blame but himself. Mr. Sunak supported the fiscal austerity of the Conservative-led government of David Cameron and his chancellor, George Osborne, which hurt Britain’s productivity and hollowed out its public services. And he championed Brexit, which cut into its trade with the European Union, scared off investment and worsened its labor shortage.
“He’s quite rare in being directly associated with both Cameron-Osborne austerity and Johnsonian hard Brexit,” said Jonathan Portes, a professor of economics and public policy at Kings College London. “Many other senior Tories could plausibly claim that they didn’t really buy into one or the other. Not Sunak.”
This week’s by-elections attest to Mr. Sunak’s predicament. One seat belonged to Mr. Johnson, who resigned from Parliament after a committee recommended suspending him for misleading lawmakers about his attendance at parties during the coronavirus pandemic lockdowns. Another was held by an ally of Mr. Johnson, who also quit, and the third by a lawmaker who resigned after allegations of drug use and sexual misconduct.
While Mr. Johnson’s soiled legacy and Conservative Party scandals will play a role in these races, analysts say the cost-of-living crisis will be the dominant theme. Few governments, Professor Bale noted, win elections when real wages are eroding, as they are in Britain. In the latest polls, the opposition Labour Party leads the Conservatives by close to 20 percentage points.
The specter of a sweeping defeat has put Mr. Sunak under pressure from Tory backbenchers to offer voters relief in the form of tax cuts or help in paying their mortgages. The most analysts expect, however, is for him to promise a reduction in income taxes next spring, to be deferred until after the election.
As Mr. Sunak likes to remind people, not all of Britain’s problems are unique or self-inflicted. Like many other countries, it suffered from supply bottlenecks after pandemic lockdowns ended, from rising food prices and from the lingering impact of soaring energy prices after Russia invaded Ukraine.
Yet Britain’s core inflation rate — which excludes volatile energy and food prices and is a gauge for domestic price pressures — has remained high at 6.9 percent, compared to 4.8 percent in the United States and 5.4 percent in the eurozone.
“That does suggest these inflation dynamics have become more embedded than they have in other countries,” said Kristin Forbes, a professor of management and global economics at the Massachusetts Institute of Technology, and a former member of the Bank of England’s rate-setting committee.
Britain, she said, had the misfortune of being hit by both the energy spike, like its neighbors in Europe, and strong domestic inflationary pressures because of a tight labor market, like the United States.
“The U.K. was facing a more difficult challenge than the other countries, in the sense it was really hit by a confluence of shocks that were greater than the individual shocks hitting other countries,” Professor Forbes said.
But there are other problems that are distinctively British. Unlike most countries, Britain still has more people out of the labor force than before the pandemic. A majority say they can’t work because of long-term illnesses, a problem exacerbated by the crisis in the N.H.S. With so many job vacancies, wages are rising rapidly, which further fuels inflation.
Mr. Sunak has offered to increase public sector wages by five percent to seven percent to end strikes that have closed Britain’s schools and crippled the health service. But that has yet to quell the labor unrest.
Britain has so far avoided a recession, surprising some economists. But its resilience could crack, as people curtail spending to pay their rising mortgage bills. Already, about 4.5 million households have had to swallow rate increases since the Bank of England started raising interest rates in December 2021. The rest, another 4 million, will be affected by higher rates by the end of 2026.
As with other Western leaders, Mr. Sunak’s fortunes may be largely out of his hands. Last month, the Bank of England, stung by the virulence of inflation, unexpectedly raised interest rates by half a percent, to five percent. Traders are betting that rates will climb further still, to about 5.8 percent by the end of the year — implying several more rate increases that would mean higher financing costs for businesses and households and hurt economic growth even more.
“The more tightening we see, the risk of recession rises,” said Mr. Pradhan, who served as a deputy director of the International Monetary Fund. “It wouldn’t take very much to tip the U.K. economy into recession.”