“Our economy has really turned around,” said Rishi Sunak, the British Prime Minister, last week as he introduced his party’s election manifesto, backed by recent data showing that the British economy had emerged from a recession stronger than at the start of the crisis was expected. years and that inflation had slowed significantly.
Justifying the optimism, data released on Wednesday showed consumer prices rose 2 percent in May from a year earlier, hitting the Bank of England’s target for the first time since 2021. That was also a lot lower than the 11.1 percent in October 2022, when Mr. Sunak began his premiership.
Many economists argue that it will take more than a few good economic indicators to change the UK’s economic trajectory after more than a decade of slow economic growth, chronically weak productivity, high taxes and struggling public services, with a noticeably underfunded and overburdened National Health Service.
Polls suggest there is a desire to oust the ruling Conservative Party from Downing Street after 14 years in next month’s general election. But lawmakers in the opposition Labor party have already warned that – if they win – they will inherit a faltering economy with little room for bold changes.
How did Britain get here?
A focus on cuts
When the Conservative Party came to power in 2010, the country was reeling from the major financial crisis. Debts had climbed higher and the country’s budget deficit was at its post-war peak.
David Cameron, the then Prime Minister, and his Chancellor, George Osborne, placed the burden heavily on cutting government spending, rather than on tax increases. What followed were years of austerity, with ministries facing massive cuts to their budgets.
Spending on services such as courts, libraries and public transport was cut, but so were capital expenditure budgets, which delayed or halted the maintenance and construction of schools, hospitals and prisons. Benefits for the unemployed and low-income earners were severely cut.
Britain “had a pretty severe austerity program,” says Anna Valero, an economist at the London School of Economics. It was arguably too deep, and therefore “hindered the recovery, and hampered the extent to which our economy could invest,” she added.
A legacy of stagnation
For many economists, the past fourteen years have been marked by stagnant productivity growth in Britain. The amount of economic output for each hour worked has hardly changed. It is the most important determinant of living standards: wages rise as productivity improves. In Great Britain, wages, adjusted for inflation, are approximately at the same level as at the end of 2007.
“We have to recognize that this is a pretty deep hole that the economy has fallen into,” said Diane Coyle, a professor of public policy at the University of Cambridge. “Many countries have lower productivity growth. We don’t have one.”
According to the Resolution Foundation, a research organization, this decade and a half of lost wage growth has cost the average worker 10,700 pounds (about $13,600) a year. Middle-income Britons are 20 percent poorer than their peers in Germany and 9 percent poorer than those in France, the think tank estimates.
The lasting effect of Brexit
While the economic consequences of Britain’s departure from the European Union are still being felt, some of the costs of that decision are already clear. After the referendum, years of policy uncertainty under Theresa May’s government brought business investment to a standstill. Then the new deal with the European Union threw up trade barriers in most industries, making work harder and more expensive for everyone from Scottish fishermen to London bankers.
Instead of investing in infrastructure, innovation and skills, the British government has long been distracted by Brexit, Ms Valero said. “If everyone is worried about how to actually get Brexit done, how to make it work and all the political implications of it, people naturally pay less attention to these long-term issues,” she said.
Broken Britain
A long period of low investment and pressure on public spending has left many feeling that Britain is broken.
Despite the heaviest tax burden in seventy years, many public services appear to be on the brink of collapse. More than seven million cases are on the NHS waiting list, social care is severely underfunded and understaffed, and spending per school pupil is the same as fourteen years ago. Although unemployment is low, there is a sharp increase in the number of people who can no longer work due to long-term ill health.
The list of challenges is long and varied: a backlog in the courts means long waiting times for criminal cases. There is a lack of affordable housing and rents are at record highs. Burdensome regulations and the power of local governments hinder housing construction, 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 is hampered by strikes, understaffing and poor maintenance. And there are endless complaints about potholes across the country.
The Liz Truss Experiment
The unrest was most visible during the 49-day premiership of Liz Truss, who was on the verge of changing British economic policy only to have investors oppose her ideas and force her into a U-turn and eventual resignation .
Mrs Truss had the right diagnosis – the need for faster long-term economic growth – but the wrong medicine for the British problem. She hoped to strengthen the economy by cutting taxes and borrowing heavily to do so, on the heels of big spending to support households during the economic shocks of the pandemic and the energy crisis following Russia’s invasion of Ukraine.
She destroyed the Conservative Party’s reputation for sound financial management. Since then, the policy of both major political parties has been aimed at showing restraint.
Both parties have pledged not to increase Britain’s three major tax rates: personal income tax, national insurance and VAT, a type of sales tax. But many people will still have to pay higher taxes as their wages rise, pushing them into higher tax brackets, which will remain frozen for several years to come.
What’s next?
Many economists say tax promises will be difficult to deliver. There are huge demands to spend more on public services, especially to meet commitments to increase military spending and fix the NHS, and other government sectors, such as the courts, cannot tolerate more cuts. To keep promises to reduce debt, taxes will have to rise if spending cannot be cut further.
But the tight spot that Britain’s next leaders will find themselves in could be eased if there is a decent, sustained increase in economic growth. So far, British economic growth has benefited from population growth, mainly due to migration. The economy is the same size per person as it was at the last election in 2019.
“When we actually think about sustainable growth, it comes down to productivity growth,” Ms. Valero said. That would also lead to higher wages and better living standards, which would require more investment in infrastructure, education and innovation, and a planning system that enabled those investments, she said.
In the meantime, voters will decide on July 4 which political party they prefer for their growth plan.