Rishi Sunak's Strategy behind the UK elections

Rishi Sunak will be named the U.K.‘s new prime minister, following a fast-tracked Conservative Party leadership race initiated to fill the void left by  Liz Truss ’s resignation.

Sunak — who will be the country’s first prime minister of color — won the role of Conservative Party leader after his sole competitor, Penny Mordaunt , dropped out of the race moments before votes from members of Parliament (MPs) were due to be announced Monday afternoon. It follows the withdrawal of former Prime Minister Boris Johnson from the leadership race Sunday.

What led to Sunak's win?

1) A steady pair of fiscal hands

The former finance minister steps into the role as the country grapple with a worsening economic picture following the chaotic fallout from Truss’ September mini-budget.

Stock markets were roiled, sterling plunged and the Bank of England was forced to intervene with an emergency bond-buying operation after Truss and then-Finance Minister Kwasi Kwarteng announced a raft of unfunded tax cuts seen to disproportionately benefit the wealthy, even as the country faces a worsening cost-of-living crisis. 

Sunak, who is credited with steering the U.K. economy through the height of the Covid-19 pandemic, is broadly seen as a safe pair of fiscal hands. Indeed, after being berated by Truss during the race as a voice of Treasury orthodoxy, his critique of the PM’s “unfunded tax cuts” appears to have been vindicated.

The argument between what Sunak portrayed as his fiscal orthodoxy versus Truss’s unfunded profligacy, and what Truss portrayed as her low-tax Conservatism versus Sunak’s big state, defined the contest, and the Tories’ (and Labour’s) whole strategy for the elections.

2) The 3 F's- Fit for Future

The UK government has launched a new Digital Strategy which aims to create jobs, strengthen skills, and boost talent and infrastructure in the country’s tech market.

Business lobby groups have been calling on the government for an overarching tech strategy for some time now, with tech bosses complaining of a lack of talented workers since Brexit. Current estimates suggest the skills gap is costing the UK economy as much as £63bn.

The new strategy – an update on the government’s 2017 plan – is largely focused on ensuring that the UK’s public and private tech infrastructure is fit for purpose.

Sunak's new measures to keep the UK’s tech sector “fit for the future” include an external review of the UK’s computer processing capabilities, as well as a new expert council to tackle the digital skills gap. The council will bring together industry leaders and training experts from companies ranging from Amazon Web Services (AWS) to Neo-Bank Starling .

Who is Sunak?

The 42-year-old former finance minister is one of Britain’s wealthiest politicians. He was born in Southampton, England, to parents of Indian origin who had emigrated from East Africa.

Educated at one of Britain’s most prestigious private schools, as was his former boss Boris Johnson, he has a glittering résumé, with degrees from the University of Oxford and Stanford University and a stint at the Goldman Sachs investment bank. Sunak is married to the Indian tech heiress Akshata Murty.

He competed against Liz Truss to lead Britain’s Conservative Party after Prime Minister Boris Johnson announced his scandal-induced resignation in July. Loyalists point out that his candidacy received the most support from his parliamentary colleagues. And many of his economic ideas have turned out to be prescient, those backers say.

Why did Liz Truss resign?

Truss came to office with a vision for a low-tax, small-government state. Her financial plan tanked the British economy and politicians from the ruling Conservative Party called on her to quit. According to new polling, only 10% of the country viewed Truss favorably.

Truss became prime minister on Sept. 6 after being elected by members of the Conservative Party to replace Boris Johnson as their leader. Her first two weeks included the death of Queen Elizabeth II and were politically muted while the country entered a period of mourning.

But on Sept. 23, her finance minister, Kwasi Kwarteng, made a fatal misstep: Without any warning, he unveiled a significant shift in the country’s economic strategy, promising to slash taxes for the highest earners and biggest corporations — with no plans to pay for it.

Almost immediately, the British pound’s valuation tanked, the United Kingdom’s central bank was forced to hike interest rates, and the cost of taking out mortgages soared. Inflation — already at record highs — raised the cost of living further, shredding the Conservative Party’s reputation for fiscal responsibility. Some working-class voters who were drawn to Conservatives by their embrace of Brexit were turned off by a renewed sense that the party represented only the interests of financial elites.

Market's Reaction

The Sterling rose to $1.1326 against the dollar shortly after the announcement of Sunak’s win.

FTSE 100 (.FTSE) rises 0.6% on the day, supported by consumer sectors and industrials, but is underperforming the broader European markets, where the STOXX 600 is up 1.2%.

Melanie Leech , CHIEF EXECUTIVE, BRITISH PROPERTY FEDERATION:

"The last few months have damaged the UK’s international reputation and economic standing, the country urgently needs strong and competent leadership to rebuild confidence. The new Prime Minister needs to confirm their leadership team as soon as possible and provide clarity on their strategy for stabilising the economy and their policy priorities.

The property industry stands ready to work with Rishi Sunak in creating a thriving economy and addressing regional inequalities through the delivery of new homes, work and leisure spaces that are essential to revitalising our towns and high streets."

Art Hogan , CHIEF MARKET STRATEGIST, B. RILEY WEALTH, NEW YORK:

"Coming to a very rapid decision on who the prime minister is going be certainly breathes a sigh of relief into the markets. If this was something that got dragged out for a long period of time, that uncertainty would certainly wreak havoc both in UK gilts and in the global equity markets. Time will tell how this plays out in the medium to longer term but in the short run I think the rapid decision on Sunak is one the market seems to be applauding here this morning. At least we've checked that box and can move on to other things to be concerned about."

JOSH MAHONEY, SENIOR MARKET ANALYST, IG GROUP, LONDON:

"The news of Rishi Sunak's successful bid to become the new Prime Minister has spared markets any additional uncertainty today, with the UK essentially set to be steered through this crisis by two chancellors.

Gilt markets have certainly responded positively, with falling yields bringing hope that we will see borrowing costs continue to ease after a turbulent Truss tenure. Nonetheless, with the pro-growth policies a thing of the past, the pound finds itself under pressure given the warning signs provided by the collapsing PMI surveys released this morning.

The hope for many is that tighter central bank and government policies will swiftly drive down inflation without hurting the economy too much. However, traders will remain concerned that the economic fallout is more damaging than expected, and inflation keeps rates higher for longer."

PAUL JOHNSON, DIRECTOR, INSTITUTE FOR FISCAL STUDIES, SPEAKING TO BBC TELEVISION:

"One of the problems I think that the new prime minister and his new chancellor face is that, given all the uncertainty that's been created over the last few weeks, they may have to make more difficult decisions than they otherwise would have had to. Because the markets are still somewhat spooked and they are going to be wanting to see some clear and decisive action, perhaps more than they would have required (if) we had not had all this upset over the last few weeks."

Jason Paltrowitz , DIRECTOR AND EXECUTIVE VICE PRESIDENT , CORPORATE SERVICES, OTC MARKETS GROUP, NEW YORK:

"From a U.S. perspective, this will be viewed as a positive step to creating stability and clarity for the near future. U.S. investors will want to see Sunak and, assuming he stays, Hunt, provide a well thought out and clear strategy to tackle the ongoing economic issues impacting the UK."

Ruth Gregory , SENIOR UK ECONOMIST, CAPITAL ECONOMICS, LONDON:

"The fall in gilt yields on the news today that Rishi Sunak will become the UK’s next Prime Minister has reduced the chances of a significant fiscal consolidation. Even so, the new PM will still have to work hard to restore stability in the eyes of the financial markets.

This means that the risks to our forecast that the economy will enter a recession involving a peak-to-trough fall in GDP of around 2% are still skewed to the downside."

MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON:

"It seems that the announcement was pretty well priced in by this point - especially after sterling’s notable gains at the Asia open last night. Having said that, Sunak taking over as PM should restore a significant amount of credibility around UK policy, which is likely to limit downside for sterling assets in the near term."

Danni Hewson , FINANCIAL ANALYST AT AJ BELL, LONDON:

"The markets are confident that they know the kind of Prime Minister Rishi Sunak is likely going to be because they know the kind of chancellor that he was and clearly he understood how damaging those unfunded tax cuts were likely to be.

The yields have come down, which just demonstrates that the markets do feel more comfortable and they feel that once again the UK is getting back to the kind of economy that they would expect from an established economy rather than an emerging economy.

With the pound, just because we have a new Prime Minister in place, all of the issues don't just go away and we still have remarkable strength being enjoyed by the dollar."

Andrey Giles C. , ANALYST, HYCM, LONDON:

“With Rishi Sunak named as the UK’s third prime minister in three months, the question now is whether today's events will mark the beginning of a turn higher for the GBP as confidence returns in the Government’s fiscal plans.

However Sunak’s premiership unfolds, there are likely to be more difficult times ahead for the UK economy as it grapples its way out of a worsening downturn and even the prospect of a general election – upheaval which could derail the markets further.

That said, there is one aspect of help for the GBP that is often overlooked. On the other side of the Atlantic, a slowdown in Federal Reserve policy would likely help lift the GBP as much, if even not more, than UK fiscal policy.”