What went wrong with UK economy| Challenges for Rishi Sunak

What went wrong with UK economy| Can Rishi Sunak help UK to increase their GDP

Economic Crisis in UK:

UK had many indicators of economic crisis during Liz Truss government. Britain had emerged from the pandemic with most economic indicators flashing red. The prospects for the UK economy have weakened this year in response to the Russian invasion of Ukraine A messy divorce process from the EU that remains unresolved Global supply chain blockages hitting many business sectors (BREXIT).

The consumer prices index has jumped from almost zero during the pandemic to 9.1% and was forecasted to top 11% by October Most economists believed the growth in prices will ease next year, but their forecasts depended on the war in Ukraine ending.

Britain suffered the biggest fall in national income (GDP) since the early 18th century when the economy was mothballed in April 2020. It bounced hack rapidly, but the recovery slowed this year a the global economy began to stutter.

Tax burden

Ministers faced pressure from backbench Tory MPs to reverse the Johnson administration’s plans to increase taxes on businesses and households to pay for spending during the pandemic. However, the scope for tax cuts was limited, especially many Conservatives were urging the government to increase the defence budget in the face of the renewed threat from Russia.

UK trade

France and Britain have tracked each other for decades by showing the value of trade as a percentage of GDP. Recent figures have shown Britain’s trade stagnated while France’s position has improved dramatically. Brexit is blamed by many economists for the UK’s less rosy outlook.

UK workforce

Official estimates show the UK has about 1.2 million fewer workers in 2022 than was expected in 2019. Many EU workers returned home during the pandemic, older workers took early retirement and tens of thousands of students returned to education. Brexit and Covid have combined to reduce the number of workers seeking employment, pushing up wages and hindering recovery.

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Mistakes by Lizz Truss:

Truss took office at a precarious time when UK had been facing long-term economic stagnation on the one hand and double-digit inflation on the other. Due to her infamous “Mini-Budget” PM has been forced to resign following a rebellion within her Conservative Party

  • Truss ran on an agenda of reviving growth through widespread tax cuts as well as providing energy price guarantees against rampaging inflation. Pais On September 23, Truss’s chancellor Kwasi Kwarteng presented a mini-Budget that essentially ramped up spending while also cutting tax revenues. This Budget meant that Government’s borrowings were set to increase. At a time when UK is facing historically high inflation, this was the worst thing that could have happened.
  • A sharp rise in borrowings at the time of slow economy would mean that Government might not be able to repay the accumulated debts. In a panic reaction, investors started selling all possible UK assets.
  • As such, the pound sterling fell to historic lows against USD, worsening the imported inflation in the process. Similarly, investors started selling Government Bonds leading to increase in their yields. The Bank of England rushed to step in to stop a financial collapse.

Challenges before Rishi Sunak:

One of Sunak’s first challenges will be to show he can control a Conservative Party that has a large majority in parliament but is riven with factions that differ on key issues like Brexit and immigration as well as economic management. Higher taxes will be strongly opposed by some in the party; others will oppose spending cuts in key areas like health and defence.

The key issue of trade with Northern Ireland is still being negotiated with Brussels. Sunak would face pressure to get a deal that rewrites parts of the initial exit agreement without conceding to a lasting EU say over trade between Britain and Northern Ireland.

He will also face calls to follow through on government promises to control immigration into the country, an issue which many Conservative lawmakers see as critical to winning over voters at the next election.

Way Forward:

A debt-cutting strategy from Hunt and the new government headed by Rishi Sunak should assure the markets about the UK’s fiscal stability, but it’s still unknown whether this would happen via more taxes or less spending. Some evidence on what would be best for the economy supports raising capital income taxes (capital gains tax and inheritance tax) rather than cutting public spending or raising income taxes.

In the long term, the UK’s major problems are stagnating growth and lack of productivity. And if the new government addresses current problems by raising taxes and cutting spending-alongside higher interest rates from the Bank of England – there will be more economic pain.

Sodhi Gautam

Sodhi Gautam

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