(CTN News) –“Our economy has truly turned a corner,” Rishi Sunak, Britain’s prime minister, said last week as he introduced his party’s election manifesto. Recent data show that Britain’s economy exited a recession more strongly than expected at the beginning of the year, and inflation has slowed significantly.
Justifying the confidence, statistics released on Wednesday revealed that consumer prices increased by 2% in May from the previous year, reaching the Bank of England’s objective for the first time since 2021. That was also down significantly from 11.1 percent in October 2022, when Mr. Sunak began his leadership.
Many economists believe it will take more than a few positive economic indicators to change Britain’s economic trajectory after more than a decade of slow economic growth, chronically low productivity, high taxes, and struggling public services, including a significantly underfunded and overburdened National Health Service.
Polls indicate a desire to remove the Conservative Party from Downing Street after 14 years, in the upcoming general election. However, parliamentarians from the opposition Labour Party have already warned that if they win, they will inherit a weakened economy with little room for major reforms.
How did Britain arrive here?
A concentration on austerity.
When the Conservative Party took power in 2010, the country was reeling from the Great Financial Crisis. Debt had risen, and the country’s budget deficit was at a peacetime high.
David Cameron, the then-prime minister, and his chancellor, George Osborne, prioritized cutting government spending over raising taxes. Years of austerity followed, with massive budget cuts imposed on government departments.
Spending on services such as courts, libraries, and mass transit was reduced, as were investment budgets. Maintenance and development of schools, hospitals, and prisons were postponed or halted. Benefits for the unemployed and low-income workers were significantly reduced.
Britain “had quite a severe program of austerity,” according to Anna Valero, an economist at the London School of Economics. It was perhaps too deep, “hampering the recovery, hampering the extent to which our economy could invest,” she noted.
For many economists, the last 14 years have been defined by Britain’s lackluster productivity growth. Economic output per hour worked has been relatively constant. It is the primary determinant of living standards. Wages rise as productivity improves. After accounting for inflation, wages in Britain are nearly the same as they were at the end of 2007.
“We have to recognize that this is a pretty deep hole that the economy’s gotten into,” said Diane Coyle, a professor of public policy at Cambridge. “Many countries see reduced productivity growth. “We have none.”
According to the Resolution Foundation, a research organization, the average worker has lost 10,700 pounds (approximately $13,600) per year as a result of missed pay growth during the previous decade and a half.
The think tank concluded that middle-income Britons are 20% poorer than their counterparts in Germany and 9% poorer than those in France.
The long-term implications of Brexit
Though the economic impact of Britain’s exit from the European Union is still being felt, some of the costs of that decision are clearly visible. Following the vote, years of policy uncertainty under Theresa May’s government halted industry investment.
The new agreement with the European Union created trade obstacles, making labor tougher and more expensive for everyone, from Scottish fishermen to London financiers.
Brexit kept the British government from investing in infrastructure, innovation, and skills for a long time, according to Ms. Valero. “If everyone is concerned with how to actually do Brexit, how to make it work and all the political fallout of it, of course, people have less attention to focus on these long-term issues,” she stated.
Low investment and public budget cuts have led many to believe Britain is broken.
Despite the highest tax burden in 70 years, many public services look to be on the verge of collapse. More than seven million cases are on the waiting list for the National Health Service, social care is badly underfunded and understaffed, and spending per student is unchanged from 14 years ago.
Despite low unemployment, the number of people out of work due to long-term illness has increased significantly.
The list of obstacles is extensive and diverse: Court backlogs result in lengthy wait times for criminal cases. There isn’t enough affordable housing, and rents are at an all-time high.
Housing construction, as well as renewable energy infrastructure, data centers, and labs, are hindered by complex regulations and municipal authorities.
The number of people using food banks has increased in the last five years. Strikes, understaffing, and poor maintenance have hampered public transportation, and there are numerous concerns about potholes all around the country.
The Liz Truss experiment.
The turbulence was most blatantly evident in the 49-day premiership of Liz Truss, who set out to overhaul Britain’s economic policies, only to have investors balk at her ideas, forcing her to backtrack and eventually resign.
Ms. Truss had the right diagnosis — faster long-term economic development — but the wrong solution to Britain’s problem. She wanted to rebuild the economy by cutting taxes and borrowing extensively, after large amounts of expenditure to help households cope with the economic shocks of the pandemic and energy crisis caused by Russia’s invasion of Ukraine.
She ruined the Conservative Party’s image for sound fiscal management. Since then, policy from both main political parties has emphasized caution.
Both parties have committed not to raise Britain’s three major tax rates: personal income taxes, National Insurance, and VAT (a sort of sales tax). However, many people will still face higher taxes when their salaries rise, propelling them into higher tax rates that will remain stagnant for several years.
What happens next?
Many economists believe tax pledges will be difficult to keep. There is enormous pressure to spend more on public services, particularly to satisfy obligations to raise military spending and repair the National Health Service, while other government departments, such as the judiciary, cannot take more cuts. If spending cannot be lowered further, taxes must be raised to meet debt reduction goals.
However, the difficult predicament that Britain’s next leaders will face could be alleviated if economic development sustains improvement. So far, Britain’s economic growth has benefited from a population increase, owing primarily to migration. The economy remains the same size per person as it was in the previous election in 2019.
“If we’re actually thinking about sustainably growing, it comes down to productivity growth,” said Ms. Valero. That would also result in greater incomes and better living standards, necessitating increased investment in infrastructure, education, and innovation, as well as a planning system that enabled such investment, she said.
Meanwhile, voters will select which political party’s growth strategy they prefer on July 4.
Source: NYTimes
