Comment editor Ben Evans examines the causes behind the current dire economic situation in the UK and takes a look at the political battle for growth.
Sandwiches, tea, drinks and, of course, cake. All staples of a Royal bank holiday and many were enjoyed last weekend to celebrate the King’s coronation. Millions across the world were expected to tune in, whilst people and businesses across the country braced for a huge weekend of jovial spending. Yet it still appeared a world away from the optimistic street parties of 2012’s Diamond Jubilee or even when Sam Ryder took to the stage last year to celebrate the Queen’s ‘Platty Joobs’. Our new King has been crowned during a period of national turmoil, an endless run of industrial action and double-digit inflation – all symptoms of an economy that has stalled whilst attempting a hill start. This has created a toxic environment for a Royal celebration centred on demonstrating wealth and pomp, as many still face a choice between feeding themselves or heating their homes. For the historians amongst us, it is hard not to draw a parallel with our late Queen’s very own Silver Jubilee back in 1977. Both then and now royalists celebrated and republicans questioned. The UK was gripped by an inflationary spiral, huge levels of industrial action and the government was left paralysed. Ultimately for many, it was an expensive party, and this was no different. Food inflation is as high as 19% currently, the highest rate since (you guessed it) 1977. So, what made the UK “The Sick Man of Europe” back then, and why has our economy succumbed to a similar illness once again? In 1979, Thatcher claimed she had the medicine, but after 40 years of neo-liberal policy the evil of “stagflation” has returned. It’s time for a new direction.
How has it come to this?
Firstly, in order to propose any ideas for our path forward one must understand how the UK has ended up in such a precarious position. The popular phrase “stagflation” was born in the 1970s. It is economic jargon for the lethal combination of rising prices with falling output and employment – meaning people are paid less whilst being expected to pay more. This is a rarity but can be devastating. Like in the 1970s, our current period of “stagflation” has resulted from an energy shock. Back then it was an OPEC oil embargo on the West following support for Israel during the Yom Kippur War. This time it’s the expansion of world output stemming from the globe’s post-COVID recovery and the reduction in the supply of oil and gas after Russia’s invasion of Ukraine. This ultimately pushed world energy prices to astronomical levels, leading to soaring bills and, of course, eye-watering profits for energy firms whose costs haven’t shifted even slightly. However, the energy crisis has been a world issue, which begs the question, is the UK uniquely worse off?
Sadly, the answer is yes. The UK is the only economy in the G7 (a group of the world’s most economically developed nations) which still has a smaller output compared to before the pandemic. Shockingly, the UK’s anaemic growth is even behind Russia’s expected growth rate of 0.7% for 2023, despite the barrage of sanctions that have battered the pariah’s economy. The reasoning behind this is that the UK has experienced the highest inflation in the G7, meaning most increases in national income have been eroded away by huge price rises. These have in turn prompted the Bank of England to recently raise the base interest rate, which was designed to discourage borrowing and promote saving. This has certainly done just that. For those new buyers with large mortgages (approximately three million people), these rate rises added up to an additional £3,000 to their repayments. This huge spike, on the back of over 10% inflation, has created less of a squeeze and more of a crush on people’s budgets. Casting our minds back to 1977, interest rates were also on the rise, up to as high as 17% by 1979, for context they’re considered “high” at 4.25% this year.
Inflation is the Priority, “No ifs, no buts”
This is all part of the Bank of England’s inflation-targeting strategy of contractionary monetary policy. The hope is that higher rates will lead to people spending less – ultimately reducing demand and cooling prices. When coupled with the “stealth tax” hidden in Sunak’s budget, with no updates for the income tax brackets despite high levels of inflation and earnings, it should lead to short term pain for the promise of future stability. Looking back to the late 1970s, these policies contributed to a prolonged recession in the early 1980s, and then an eventual return to growth during the ‘Lawson Boom’ (1986-1989). Sunak will seek to emulate this. The first step is stability, the second will be an escape from stagnation. This will require a unified vision and currently, this is lacking from the government.
The Political Battle for Growth
This economic outlook will come to shape the next general election and the pursuit of growth will be an issue that both parties plan to fight on. The man who aims to usurp the Prime Minister, Labour’s Sir Keir Starmer told the economist that “economic growth is the absolute cornerstone for everything”. He isn’t wrong. Since the dawn of economics, growth has been touted as the tide that lifts all boats, raising incomes across society by providing better jobs and higher wages. However, growth cannot purely be achieved through more spending. Britain has a chronic productivity problem, with labour productivity only growing approximately 8% since the 2008 financial crisis. It is this stagnant output that has contributed to British people’s wages flatlining over the previous decade. Sunak’s Maths A-level pledge is the best the government has offered on this front and the effectiveness of that is doubtful. Labour’s £28bn a year commitment to green investment and focus on public services has offered more hope to people, but debt and inflationary constraints will limit those policies. The key way to get ourselves out of this rut is to address the political elephant in the room, Brexit. It has been estimated by the OBR that since January 2020 it has cut 4% off the UK’s projected growth (approximately £100bn a year), through stifling trade and investment. As politically toxic as the issue may be, from an economic viewpoint, UK policymakers need to re-evaluate the relationship with the EU and bring the nation closer to our European neighbours once again.
For the election, the Tories will be forced by their party to propose tax cuts aimed at promoting growth (though they won’t dare take it as far as Truss). As for Labour, targeting spending will be their method of choice. The UK economy does need an impetus to get it moving again and for both parties, economic policy will become a hard fought issue. As the adage goes, it’s the economy stupid!
Ultimately there is no singular magic pill to treat the UK’s ills. These have long festered under the surface and it will take longer to reverse them. To bring this back to the present, compromise will be needed to strike a deal with the unions. The key workers deserve the rise that can be afforded to shield people from the horrid effects of high inflation. As the rain poured whilst the crown was placed on King Charles’ head, for some, the UK felt like a very gloomy place. However, as we begin the fresh start of a new monarch’s reign, people should look forward to the future. The peak of inflation has been reached and it will gradually ease. What the UK now requires is a unified strategy to raise growth and productivity across all nations and regions (not just in the capital), which will pay dividends. Historically, the name Charles has been deemed cursed and avoided by monarchs. Understandably so. Let’s hope that this time we can buck the trend.
