Britain’s budget problems began during the 2008 financial crisis

Over the past few weeks, economic news from the UK has focused heavily on the state of the UK’s national finances and how this will affect the UK public and the prospects for economic growth.

A number of allegations and denials have been made between the rival Labor and Conservative parties over the country’s budget deficit, particularly between current and former finance ministers Rachel Reeves and Jeremy Hunt.

Regardless of how the UK’s current fiscal situation is, it is clear that the shortfalls are now two years in the making and open the risk of having consequences that can be for years to come. The main dilemma facing Labor today is that the country cannot generate enough revenue to close systemic deficits without sustained economic growth, but also cannot create economic growth without real investment, from the public and private sectors.

In many ways, the current fiscal situation stems from the financial crisis of 2008 and the fact that the country’s economy cannot bounce back easily to cover the budget shortfalls that have occurred.

When British profits failed to recover, the Conservative government of the time opted to impose austerity measures, temporarily reducing public investment in everything from infrastructure to health and social services.

The problem lies in the fact that these measures, sold as short-term solutions, are still in place and the costs of the continuing aging of the British population, the burden of Brexit on everything from small business exporters to the financial sector, and sluggish economic growth continue to mean any options available to the current Labor government and remain limited.

One thing is clear that the British government cannot do, unlike countries such as the United States, China, or Japan, running large deficits, by increasing spending or reducing taxes. Borrowing in the financial year to August stood at £64.1 billion ($85 billion), with the country’s debt at 100% of GDP.

For decades, the UK has been considered one of the world’s reserve currencies, but with all the benefits it provides, recent events have strengthened this to prevent it from happening again. The bond market’s reaction to Prime Minister Liz Truss’ proposed 2022 budget suggests that the private sector will not support significant deficit spending, particularly from tax cuts.

At the same time, Labor and Conservative leaders are aware of the limited financial resources currently available to finance public programmes. One well-known argument put forward for Brexit is the fact that money sent to the EU could be used to restore funding to the beleaguered National Health Service.

In recent days, in advance of the Labor Party Conference that kicked off on Friday and the release next month of the first budget of the new Labor government, concerns about the new level of austerity have become widespread. The new coverage of potential future fuel benefit cuts for British pensioners and the new House of Lords report on the unsustainability of the current budget deficit has only raised more concerns.

The new Labor government has struggled because it does not plan to implement further austerity in public services, which was underlined by Reeves’ keynote speech on Monday evening.

The main question, not only for the party conference, but also for the upcoming Labor plan is how to address the need for greater investment in the public sphere, especially in services and infrastructure, and also to attract greater private sector investment in the country. to help address shortfalls in revenue and economic opportunity.

One sign of a possible solution is from the government’s intention to use private development money to help complete the HS2 railway line into London’s upgraded Euston Station. Any such partnership must find ways to benefit investors and the public to avoid a repeat of failed privatizations such as those with Railtrack and Thames Water.

Another possibility could focus on further efforts to remove red tape and improve the efficiency of trade with continental Europe after Brexit. Many global businesses have expressed frustration with maintaining supply chains due to border delays and unclear enforcement of regulations.

The last possibility, so far rejected by the new government, is to raise taxes. Businesses and markets can also tolerate tax increases if they can see value for money paid in terms of better business services and infrastructure.

Ultimately, the private sector will look for a clear long-term plan for execution, whether in tax and fiscal policy or in courting and building long-term public-private partnerships. If Labor can do this, it will help create a stronger environment for public confidence in its economic plans for the next few years.

Kevin Klowden is the chief global strategist at the Milken Institute.