“Our economy has really turned a corner,” Rishi Sunak, Britain’s prime minister, said last week as he laid out his party’s election manifesto, buoyed by recent data showing Britain’s economy has come out of recession stronger than expected at the start of the year. year and that inflation has slowed significantly.
Data released on Wednesday justified the optimism, showing that consumer prices rose 2 percent in May from a year earlier, touching the Bank of England’s target for the first time since 2021. That was also down significantly from 11.1 percent in October 2022, when Mr. Sunak started his premiere.
Many economists say it will take more than a few good economic indicators to change Britain’s economic path after more than a decade of slow economic growth, chronically weak productivity, high taxes and public service problems, with a severely underfunded and overstretched public health system.
Polls suggest there is a desire to oust the ruling Conservative Party from Downing Street after 14 years at next month’s general election. But lawmakers in the opposition Labor Party have already warned that – if they win – they will inherit a crippled economy with little room for bold change.
How did Britain get here?
Focus on frugality
When the Conservative Party came to power in 2010, the country was in the throes of a major financial crisis. Debt soared and the country’s budget deficit was at a post-war high.
David Cameron, then prime minister, and his chancellor, George Osborne, put the onus heavily on cutting government spending rather than raising taxes. Years of austerity followed, with government departments facing huge budget cuts.
Spending on services such as courts, libraries, and mass transit has been cut, but so have investment budgets, slowing or stopping the maintenance and construction of schools, hospitals, and prisons. Benefits for the unemployed and those on low incomes have been significantly reduced.
Britain “has had a fairly severe austerity program,” said Anna Valero, an economist at the London School of Economics. It was probably too deep and therefore “holds back the recovery, holds back the extent to which our economy could invest,” she added.
Legacy of stagnation
For many economists, the past 14 years have been defined by Britain’s stagnant productivity growth. The amount of economic output for each hour worked has hardly moved. It is a key factor that determines living standards: Wages rise as productivity increases. In Britain, after adjusting for inflation, wages are roughly at the same level as at the end of 2007.
“We have to recognize that this is a pretty deep hole that the economy has fallen into,” said Diane Coyle, a professor of public policy at the University of Cambridge. “Many countries have lower productivity growth. We do not have any.”
That decade and a half of lost wage growth cost the average worker £10,700 (about $13,600) a year, according to research organization the Resolution Foundation. Middle-income Britons are 20 percent poorer than their peers in Germany and 9 percent poorer than in France, the think tank estimates.
The lasting effect of Brexit
Although the economic impact of Britain’s departure from the European Union is still being felt, some of the costs of this decision are already apparent. After the referendum, years of political uncertainty caused by Theresa May’s government stalled business investment. A new deal with the European Union then created trade barriers in most industries, making work harder and more expensive for everyone from Scottish fishermen to London bankers.
Instead of investing in infrastructure, innovation and skills, the UK government has been distracted by Brexit for too long, Ms Valero said. “If everyone is concerned with how to actually do Brexit, how to make it work and all the political implications of that, obviously people are less focused on these long-term issues,” she said.
Broken Britain
A long period of low investment and pressure on public spending has left many feeling that Britain is broken.
Despite the heaviest tax burden in 70 years, many public services appear on the verge of collapse. More than seven million cases are on NHS waiting lists, social care is severely underfunded and understaffed and spending per school pupil is the same as it was 14 years ago. Although unemployment is low, there has been a sharp increase in the number of people out of the labor force due to long-term ill health.
The list of challenges is long and varied: A pending court case means a long wait for criminal proceedings. There is a shortage of affordable housing and rents are at record highs. Burdensome regulation and the power of local authorities hold back housing development, but also green energy infrastructure, data centers and laboratories. The number of people using food banks has doubled in the past five years. Public transport is hampered by strikes, understaffing and poor maintenance. And pothole complaints are endless across the country.
The Liz Truss Experiment
The turmoil was most evident in Liz Truss’s 49-day tenure as prime minister, who decided to change Britain’s economic policy only for investors to resist her ideas and force her to reverse and eventually resign.
Mrs Truss had the right diagnosis – the need for faster long-term economic growth – but the wrong cure for Britain’s problem. She hoped to boost the economy with tax cuts and massive borrowing to do so, hot on the heels of large spending sprees to support households through the economic shocks of the pandemic and the energy crisis following Russia’s invasion of Ukraine.
It shattered the Conservative Party’s reputation for good financial management. Since then, the policies of both major political parties have focused on displays of restraint.
Both parties have pledged not to raise Britain’s big three tax rates – personal income tax, national insurance and VAT, a type of sales tax. But many people will still find themselves paying higher taxes as their wages rise, pulling them into higher tax brackets that will remain frozen for the next few years.
What will be next?
Many economists say the tax promises will be hard to keep. There are huge demands for more spending on public services, particularly to meet commitments to increase military spending and fix the NHS, and other areas of government such as the courts cannot stand further cuts. To keep the promises to reduce the debt, taxes will have to go up if spending cannot be cut further.
But the tense situation facing Britain’s next leaders could be eased if there is a proper sustained pick-up in economic growth. So far, UK economic growth has benefited from population growth, mainly due to migration. The economy is the same size per person as it was at the last election in 2019.
“If we’re really thinking about sustainable growth, it’s about productivity growth,” Ms. Valero said. That would also lead to higher wages and better living standards, which would require more investment in infrastructure, education and innovation, and a planning system to enable those investments, she said.
Meanwhile, on July 4, voters will decide which political party’s growth plan they prefer.