By Ian McConnell

Business Editor

THE return of Boris Johnson as prime minister would have been an “unmitigated economic disaster”, with a combination of Rishi Sunak in the top job and Jeremy Hunt as Chancellor “the least-bad option”, a leading Scottish economist has declared.

Jeremy Peat, vice-president of the Royal Society of Edinburgh, flagged his expectation of “some combination of further significant tax increases for a period and savings in public expenditure”, after Mr Sunak emerged victorious in the latest Tory leadership contest.

Mr Peat said: “Nobody said being PM was going to be a doddle – especially after the major cock-ups achieved by his predecessors, on top of Brexit and Covid.”

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He added: “If the tax increases were based in large part upon temporary income and wealth taxes for the higher-income groups, then there would be less impact on consumer demand. That could imply prospects of the UK moving out of recession in late 2023.”

Mr Sunak has yet to announce his Cabinet. There has been speculation he could retain Mr Hunt, who succeeded Kwasi Kwarteng as Chancellor earlier this month. Mr Kwarteng’s mini-Budget last month, much of which has since been reversed, rocked financial markets and sent sterling plunging to a record low against the dollar.

Veteran Scottish fund manager Colin McLean said yesterday: “Sunak will calm sterling and the gilt market, which had already rebounded from a very oversold position earlier in October. However, investors are concerned that the turmoil has exposed some political fractures, with a strong likelihood of change of government in 2024 if not before, and Sunak probably not the best candidate to defend the red wall seats.”

Boris Johnson pulled out of the Tory leadership race on Sunday night.

Mr Peat said: “It was notable that the markets stabilised somewhat as soon as Boris Johnson withdrew from the leadership race and it was clear that Rishi Sunak was to be the next Tory party leader and hence the next PM. That stability was critical, as any further sterling depreciation and upward movement in the cost of borrowing would have had almost unthinkable repercussions.”

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He added: “The stability, at least for the short term, was also understandable, both because the choice of Boris Johnson would have been an unmitigated economic, not to mention political, disaster and also because the combination of Sunak as PM and Jeremy Hunt as Chancellor provides the least-bad option for economic and fiscal policies going forward. They have both accepted the gravity of the situation – worsened by that brief period of trickle-down policy – and know really tough decisions remain to be made.”

Mr McLean, managing director of Edinburgh-based SVM Asset Management, highlighted his view that there “seems to be something of a split between the Bank of England and [the] Government, with the Governor’s planned doubling down on monetary austerity via sharper rate rises not looking wise in the face of a Government doing the same with fiscal policy”.

He added: “There is a danger that, after two or three decades of attempt to disconnect the Conservatives from austerity, they have again connected and given space for Labour to win City support by suggesting some element of growth policy.

“Investors may be hoping that policy settles out some way between the Kwarteng position and Hunt’s almost complete unwinding with a promise of more spending/benefits cuts.”

Colin Borland, director of devolved nations for the Federation of Small Businesses, highlighted the scale of the task ahead for Mr Sunak and flagged labour supply problems.

Mr Borland said: “Soaring costs, falling revenues, sinking business confidence and a looming recession – the Prime Minister’s in-tray on his first day isn’t short on big challenges.

“The priority has to be stabilising the economy and giving firms some much-needed predictability about the cost of doing business during the hard winter ahead.

"Delivering the energy support package for small businesses and the reversal of the national insurance rises, making sure savings are in businesses’ accounts next month, are two crucial first moves.”

Mr Borland added: “Beyond that, with some tough times ahead, there must also be a focus on securing growth and prosperity for the medium and longer term, backing our small businesses to get the country back on track. His remit of course doesn’t run across all economic levers in Scotland, such as planning, but might he, for example, be more willing to look at sorting out labour supply issues? Can his administration simplify the tax and regulatory framework so that businesses are freed up to spend more time actually doing business?”

Confirmation that Mr Sunak would be the latest Prime Minister came just hours after a key survey yesterday showed a deepening of the UK’s economic downturn.

The flash composite output index for October, published by S&P Global and the Chartered Institute of Procurement & Supply, came in at 47.2 on a seasonally adjusted basis.

This is down from 49.1 in September, and signals a sharp acceleration of the decline in combined private-sector manufacturing and services output.

The index has now been below the 50 no-change mark for three consecutive months.