image credits: The Guardian
The United Kingdom, the 5th largest economy in the world, is in a dire strait with a struggling economy and profound political crisis. The consequences can be seen in depreciating currency values, the highest inflation of the last four decades and the shortage of energy with already sky-high energy prices, ongoing strikes all around the nation, with recent data from the Office for national statistics show an economic output shrunk 0.2 per cent in the July quarter and it squirmed in last quarter also.
The Bank Of England in a very recent regular meeting announced its biggest rate hikes since 1989 to control sky-high inflation. The BOE hiked the interest rate for the eighth time in a row by 0.75 percentage points to 3 percent which was right away followed by a plunge in the pound which reportedly would cost 1.7% less growth for the UK's economy. The BOE also admitted the shrunk for the third quarter which ended up in the UK's entry into a technical recession which means negative growth in two consecutive quarters this recession would last long in 2024 as warned by the BOE. The central Bank also predicted that Britain could end up with an inflation of nearly 11% this year which may lead to more such hikes in borrowing costs and would ultimately fuel the already eye-watering cost of living crisis.
All these things are suggesting that things couldn't be worse for the land of roses. But the question is how things got this bad especially, for a nation that is renowned for its stability and constant growth, did the economic instability guide the political failure or vice versa? Or the UK is paying for its decision of saying goodbye to Brexit? Or some blunders in policy execution led to this state of chaos? This time the blend of all these prepared the perfect recipe of chaos and insatiability for the united kingdoms.
image credits: Investment Week
Is It a Brexit Blow?
Beginning with Brexit a study by the London School of Economics with the help of well-known British economists Gerard Lyons,Vicky Pryce and John Van Reenen in 2020 shows that the EU caused a major disruption in the trade practices of Britain and made it less open and less competitive which will lead to less productivity and reduced wages in upcoming decades. While some of the industries like fishing had declined to up to 30%,the electrical equipment industry is the worst hit as it relies more on EU trade routes simultaneously. The food market of Britain also resulted in a surge as it delivers more in the nation itself. Apart from this the industries faced the problem of less workers on cheap salary that resulted in increasing the bills for consumers. Because of emerging borders more paperwork came into the scenario again and it pushed the red tapism. This shows the versatility of the impact of Brexit across the country. The data of ESRI shows a 16 % fall in the UK's exports and a plunge of 20% in imports, a drop in foreign investment all of these resulted in a plunge in the overall GDP of the nation compared to other G7 nations. But somewhere Brexit also brings at least something fruitful for the UK and the rest of the world. For Britain, the decreasing value of the pound would lead to cheaper exports and cheaper services and a decent improvement in net-foreign debt position and current account balance, and the increase in trade and relations of the UK with Canada, China, India and other world giants.
It is clear that Brexit also brought some smiles with itself but the larger trajectory, facts and figures, growth graphs, and reports from all over the world, all these things point out the darker side of Brexit. However, the weight of reasons responsible for the UK's turmoil is so ponderous that Brexit cannot lift it alone. Who is the priority culprit then? Is it Lizz Truss’s policy implications that should be blamed?
Well up to some extent yes, they are! Lizz truss who came into power by promising a new era in economics and politics was left with nothing but the title of shortest-serving PM of British history due to her own decisions which are too radical and lame to some extent.
Within days of coming into power, the lady prime minister announced humongous energy support packages for businesses and houses who feared that they would be unable to afford soaring bills this winter, due to the already rocket-high global energy prices due to Russia- Ukraine conflict and the global shortage of energy during the peak consumption time as Europe was welcoming winters. The government packages promised to stress over the energy prices for the coming two years which would cost the UK up to 130 billion dollars in the coming 18 months and this enormous amount is also affected by the energy price model of Britain which are equal for all economic classes up to all levels this amount was planned to be arranged from the bonds issued by the British government but guess what UK is also heading towards a bond crisis which will lead to a currency crisis and then mortgages crisis ultimately turning the UK into a complete economic mess.
Then comes what she called the "mini-budget" which she had been thinking about for years. In the mini-budget large Tax, cuts were announced that would be funded by government borrowing even though the bond market of the UK is already not in excellent condition. If not injudicious it was surely the most radical economic plan in the recent history of Britain.
Although there is not one specific reason for the struggling economy of the UK It can be said that it was the execution of such economic policies of Lizz truss because of which the financial markets of Britain, which were traditionally known for stability were thrown into a tailspin, it was the economic blunders that pushed up mortgage costs to eye-watering levels. For sure it is somewhere the result of her policies that Britain is witnessing its highest inflation in four decades.
What's The Position Now?
Lizz truss was replaced by Rishi Sunak who in his very first speech said that the previous government had made mistakes and he is there to fix those mistakes. Well, it is too early to predict whether he passed his speech or not but it is reportedly said that there are numerous plans to bring back the economic stability of Britain. The Prime minister and his chancellor Jeremy Hunt are all set to unveil spending cuts and tax rises to fill a gap in the UK's finances from the start of 2024. There are plans to raise about 20 billion pounds through tax raises and an Increase in capital-gains tax rates closer to levels charged for income is most likely to be welcomed in the first few agendas of the new policy makers. This could incredibly raise £3-£4 billion. New government is also thinking of reintroducing the Health and Social Care Levy in upcoming months of 2024, which was also announced by Sunak earlier this year. At heights of crisis, the UK might Freeze the foreign aid budget at 0.5% of GDP instead of boosting it as planned to 0.7% in 2024/25 which would end up saving 5 billion pounds in this process. In a speech in London ,Sunak said that their government is also working on the issue of illegal migration.
Till now the policies of Sunak have been working to control overall inflation but still, there is no guarantee that the economic policies of the new government will be working in the future or not and if yes then for how long time ? Many challenges are still there like how the government will manage the tax policies smoothly,what would be their step to establish the economic and political stability again for which the United Kingdom is known for? Whether they will solve the daily problems of common people or not ? Thus these are the main areas on which the government still has to work. On the other hand, the general election is on the way to appear in the next two years or less so it is going to be a really hard task for the Sunak’s government.