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