Next UK leader to inherit an economy in a bind

Liz Truss, who is widely expected to become Britain’s new prime minister this week, has pledged to act within a week to tackle a cost-of-living crisis fueled by soaring energy bills linked to the war in Ukraine.

But Truss, speaking to the BBC on Sunday, refused to provide any details on the actions she would take, suggesting it would be wrong to discuss specific policies until she takes the top post. She stressed, however, that she understands the magnitude of the problems facing Britain.

The government has been unable to address soaring inflation, labor strife and strains on the nation’s creaking health-care system since early July, when Johnson announced his intention to resign and triggered a contest to choose his successor. The ruling Conservative Party will announce the winner on Monday.

“I want to reassure people that I am absolutely determined to sort out this issue as well as, within a month, present a full plan for how we are going to reduce taxes, how we’re going to get the British economy going, and how we are going to find our way out of these difficult times,” said Truss, who has been foreign secretary for the past year.

At 10.1% in July, Britain had the highest rate of annual inflation among Group of Seven advanced economies. Forecasters expect inflation in Britain to climb higher with Goldman Sachs saying it could top 20% if gas prices do not fall.

High dependency on imported gas and a fast-weakening currency explain much of the strength in British inflation.

The pound has fallen almost 8% against the dollar in the last three months alone - a worse performance than the euro or even the Japanese yen - making imports of energy priced in dollars even more expensive.

Truss has promised to cut taxes, starting with a reversal of an increase in social security contributions and a suspension of so-called green levies on power bills. Economists have warned that a big injection of money into the pockets of consumers could worsen Britain's inflation problem. Sunak proposes targetted support for lower-income households through higher welfare spending, an idea that Truss initially dismissed as "handouts" but one she has recently adopted.

As well as the risk of feeding inflation, tax cuts of higher spending would put further strain on Britain's budget deficit at a time when public debt is close to 100% of economic output.

Normally, a central bank forecasting a recession would cut interest rates but the BoE has other worries, chiefly the risk that the surge in inflation creates a wage-price spiral that could drag on the economy for years. Markets expect the BoE to take Bank Rate above 4% next year from 1.75% now. Most economists see a lower peak. The BoE also plans to start selling some of the bonds that it bought since the global financial crisis of 2007-08, another form of monetary policy tightening.