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The mess in the UK economy

  • September 30, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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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
economy The mess in the UK economy

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