“Our economy has really turned a corner,” Rishi Sunak, Britain’s prime minister, said last week as he launched his party’s election manifesto, buoyed by new data showing that the UK economy has emerged from recession stronger than expected at the start of the year and that inflation has eased. very slow.
Justifying the optimism, data released on Wednesday showed 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. This was also down from 11.1 percent in October 2022, when Mr. Sunak started his prime ministership.
Many economists argue that it will take more than a few good economic indicators to change the course of the UK economy after more than a decade of slow economic growth, weak productivity, high taxes and struggling public services, with an underfunded National Health Service and overstretched.
Polls show there is a desire to oust the ruling Conservative Party from Downing Street, after 14 years, in next month’s general election. But MPs in the opposition Labor Party have warned that – if they win – they will have a hobbled economy with little room for bold change.
How did England get here?
A focus on austerity
When the Conservative Party came to power in 2010, the country was facing a major financial crisis. The debt was rising, and the country’s budget deficit was high after the war.
David Cameron, then prime minister, and the chancellor, George Osborne, put a huge burden on reducing government spending, rather than increasing taxes. What followed were years of austerity as government departments saw huge cuts to their budgets.
Spending on services such as courts, libraries and mass transit is reduced, but so is the budget for making investments, reducing or stopping the maintenance and construction of schools, hospitals and prisons. Benefits for the unemployed and those on low incomes were cut sharply.
Britain “has a pretty severe austerity program,” said Anna Valero, an economist at the London School of Economics. It can be too deep, and that is why it “causes the recovery, hinders the economy from being able to invest,” he added.
A legacy of stagnation
For many economists, the past 14 years have been defined by stagnant productivity growth in the UK. The amount of economic output for each hour of work has remained virtually unchanged. This is a determinant of living standards: Wages rise as productivity rises. In the UK, wages, adjusted for inflation, are about the same as they were at the end of 2007.
“We have to recognize that this is a pretty deep hole that the economy is in,” said Diane Coyle, a professor of public policy at Cambridge University. “A lot of countries have lower productivity. We don’t.”
A decade and a half of lost wage growth cost the average worker 10,700 pounds (about $13,600) a year, according to the Resolution Foundation, a research organization. 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 effects of Brexit
Although the economic impact of the United Kingdom leaving the European Union is still playing out, some of the costs of the decision have been seen. After the referendum, years of policy uncertainty through Theresa May’s government has caused business investment to stagnate. Then new arrangements with the European Union created trade barriers in many 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, said Ms. Value. “If everyone is concerned about how to do Brexit, how it will work and all the political fallout, of course, people will not have the attention to focus on these long-term issues,” he said.
England is broken
A period of low investment and a reduction in public spending has left many feeling that Britain is in ruins.
Despite the heaviest tax burden in 70 years, many public services appear to be on the brink of collapse. More than seven million cases are on NHS waiting lists, social care is underfunded and understaffed, and spending per school pupil is the same as 14 years ago. Although unemployment is low, the number of people dropping out of the workforce is increasing due to ill health.
The list of challenges is long and varied: A backlog in the courts means a long wait for criminal trials. There is a shortage of affordable housing, and rents are high. Heavy regulations and the power of local authorities prevent the construction of houses 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 has been crippled by strikes, understaffing and poor maintenance. And there are endless complaints about potholes across the country.
The Liz Truss Experiment
The crash was most clearly seen in the 49-day premiership of Liz Truss, who set out to change Britain’s economic policy only to have investors balk at the idea and force her to do a U-turn and back down.
Ms Truss has the right diagnosis – the need for faster long-term economic growth – but the wrong medicine for Britain’s problems. They hope to boost the economy by cutting taxes and borrowing heavily to do so, as they spend heavily to support households through the economic shock of the pandemic and the energy crisis following Russia’s invasion of Ukraine.
He damaged the Conservative Party’s reputation for sound financial management. Since then, the policies of both major political parties have focused on 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 pay higher taxes as their wages rise, pulling them into higher tax brackets, which will remain frozen for years.
What’s next?
Many economists say the tax pledge will be hard to keep. There is a huge demand for more spending on public services, especially to meet commitments to increase military spending and overhaul the NHS, and other areas of government, like the judiciary, cannot afford more cuts. To keep the promise to reduce the debt, taxes must rise if spending cannot be cut further.
But the tight situation facing Britain’s next leaders could be eased if there is continued economic improvement. Until now, UK economic growth has benefited from population growth, mainly due to migration. The economy is the same size as everyone in the last election in 2019.
“If we really think about growing sustainably, it means growing productivity,” said Ms. Value. It will also lead to higher wages and better living standards, which will require more investment in infrastructure, education and innovation, and the planning system that makes those investments possible, he said.
In the meantime, voters will decide which political party plans to grow on July 4.