The mess in the UK economy

The mess in the UK economy

Subject :Economy

Context:

Britain’s pound depreciated  to an all-time low post the mini-budget laid out to slash taxes and expand spending to cushion soaring energy prices.

In the budget?

• Freeze on energy bills-energy subsidies
• Tax cut to boost consumption and investment spending
• Rise in public expenditure and borrowing

Impact- large scale capital outflows due to the prospect of higher inflation caused by the tax cuts. 

• The currency fell to a low of $1.0327 i.e. a 37-year low.
• A sharp rise in the yields or the effective interest rate charged of gilts–as government bonds due panic sell off of bonds.

What are the immediate implications?

• More money in the hands of the people by way of reducing taxes could fuel unproductive spending and demand pull inflation.
• UK’s imports will become costlier at a time when the economy is already struggling with historic inflation fuelled by rising prices of imported Russian gas in the wake of the war in Ukraine.
  • This means Britain will face more currency-induced inflation (imported inflation) pressure than its European peers and leading decline in investment sentiments.
• A sharp rise in the yields implies a rise in the cost of borrowing at the time when it intends to substantially increase its borrowings.
• Thus leading to the twin deficit issue –current account deficit and fiscal deficit.

UK economy

The UK economy was facing two big problems:

• Inflation-The biggest contributor to this spike is the price are:
  • Rise in energy prices due the Ukraine war and related shortage of natural gas export to the UK
  • Rising energy demand as winter arriving – rising electricity bills
• Stagnant growth-
  • The UK’s economy has largely been stagnant since the global financial crisis of 2008.
  • The UK economy has still not recovered to the pre-pandemic level. Between 2007 and 2020, the UK’s GDP has grown from $2.73 trillion to $2.89 trillion