• What has spooked Sunak into a snap election?
  • Both domestic and foreign concerns come to mind
  • Whatever it is, financial markets might not like it

Already well underway, there is no avoiding the political campaigning sweeping the nation. The papers, radio, television and social media channels are teeming with all manner of what party is proposing what policy for whatever supposed purpose.

To some, including me, it all seems a bit haphazard. All of a sudden, out of the blue, reintroducing some form of National Service has emerged as a major part of the Conservative platform.

Labour is trying to reassure voters that it won’t torpedo what is left of the highly-taxed, highly-regulated economy it’s about to establish even more governmental control over.

Reform, hoping for a meaningful presence in Parliament, is basking in its populist, outsider glow, claiming it’s had nothing to do with creating this mess but that it’s somehow got what it takes to clean it up.

It’s all a bit bewildering. And so one could be forgiven for not asking one of the most important questions:

Why now? Why did Prime Minister Sunak unexpectedly interrupt his colleagues’ half-term holidays to suddenly call a snap election?

While I have no specific insight into this matter I see two possibilities:

  1. Sunak knows he is going to lose no matter what so he’s throwing in the towel pre-emptively
  2. Things are about to get much worse, so best to fight the election now.

The government is privy to all manner of information it doesn’t care to share with the rest of us, at least not in real time. Many secrets eventually leak out but only after their political, economic and social consequences have long since been felt, for better or (usually) worse.

Assuming that Sunak is too young to retire and has thus decided to roll the dice now in a desperate attempt to remain in power, what is it, exactly, that might have frightened him so much?

So many possibilities…

Let’s start with the economy. It’s been limping along with a post-Covid hangover of higher inflation and interest rates for several years and even slipped into a minor recession briefly last year. Inflation has come down somewhat but it now seems to be stuck at a level still well in excess of the Bank of England’s official target.

But could that be about to change? Is inflation in fact about to head higher again? And if so, are interest rates headed higher too? Could that lead to a financial crisis of some sort?

While certainly possible, it is unlikely that Sunak could be so certain of that.

There is much more certainty around the already dire state of public finances. Not only the national government, but local councils, many of which are distressed. Late last year, a report by the Local Government Association claimed that nearly half of councils were facing financial difficulties, with one in five likely to declare bankruptcy during the current fiscal year. As reported in the Financial Times:

Nearly one in five council leaders in England have said they are likely to declare de facto bankruptcy this year or next as a result of a lack of government funding, according to the Local Government Association.

A survey by the LGA, the national membership body for local authorities, found almost half of England’s 317 councils believed they would not have enough money in 2024-5 to ensure the delivery of essential services.

More than 60 said they were at risk of having to issue section 114 notices, whereby a local authority signals its inability to fulfil a legal duty to balance the books, next year.

“While councils have worked hard to reduce costs, find efficiencies and transform services, the easy savings have long since gone,” LGA chair Shaun Davies said.

Is there a wave of council bankruptcies and/or tax increases on the way? Might some of these be in marginal seats currently held by the Tories? Almost certainly.

There are few things that focus the mind more than bankruptcy. This includes the minds of voters. Might this have spooked Sunak? Perhaps.

What about foreign policy? While normally not as pressing an issue as the economy, that could be about to change. Britain is involved, if indirectly, in the war in Ukraine. Russia is advancing along most of the front, which could soon collapse.

If it does, what is NATO going to do? Send an expeditionary force to intervene in the conflict? If so, what might be the British contribution?

Would direct British involvement in a war in Eastern Europe be popular with voters? I doubt it, especially the younger ones expected to fight.

No doubt all of the above has to be on Sunak’s mind. Could it be he is proposing reinstating National Service not because it is a vote-getter, but because it’s simply inevitable if Britain is dragged into war?

It’s impossible to know. But the possibility that Britain might soon be involved in a major foreign conflict could have spooked Sunak.

Whether domestic or foreign, it’s not a pretty picture and it’s probably only going to get worse over the coming months.

What exactly is going to happen, and when, is of course unclear. But what is, is that something quite recently got the prime minister’s attention and worried him enough to spur him into action.

Whatever that something is, I doubt the financial markets will welcome it. Interest rates might well need to rise further. The stock market might get whacked. Government finances might suddenly deteriorate. Sterling might devalue.

The UK stock market has been on a good run of late. This is completely at odds with the thinking above.

Precious metals have also been on a good run. This is completely consistent. Both markets can’t be right, can they?

As for the election itself, I have no idea how to call it. Polls can be wrong or at least misleading. But whichever party wins, I think it’s going to inherit a poisoned chalice.

So it’s best to be prepared.

Until next time,

John Butler
Investment Director, Fortune & Freedom