The news surrounding the United Kingdom in the recent past has largely revolved around the status of a resident of 10 Downing Street, which is now held by Prime Minister Rishi Sunak. As monumental and ironic as this change has been to the United Kingdom’s colonial past, the United Kingdom faces an arguably bigger issue at hand—the issue of the massive economic crisis at its doorstep.
The What and The Why?
So now, there are two main questions of pertinence - what exactly is the economic crisis that the U.K. is facing, and why should any of us even care about it? To understand and answer these two questions about the economic situation in the United Kingdom, taking a glimpse at the economic standpoint of the world would be extremely helpful. To take an accurate glimpse, one can consider the case of the United States of America. The USA has already experienced two consecutive quarters of negative GDP growth in 2022, which is already being considered to be a recession, adding to the already existing speculations of an oncoming global recession.
The International Monetary Fund (IMF) has predicted the GDP growth of the U.K. in 2023 to be less than 0.3%[1] which is frankly catastrophic for the 6th largest GDP in the world. Now, why exactly has this economic crisis occurred? What is the real reason for this? Some people are blaming the substandard decisions of the previous, short-termed Prime Minister Liz Truss, while some are blaming the elevated inflation and global economic weakness.
Which of these is right? Well frankly, both and more. The cause for an economic crisis of this magnitude cannot be reduced to one or two direct causes. It’s an amalgamation of several causes, which have worked in congruence and finally led to the present-day situation. However, if fingers are to be pointed, the factors that put the U.K. into an imminent recession are mainly: the effect of Brexit, the COVID-19 pandemic, the Russia-Ukraine conflict and certain poor decisions by the British government and its officials like the massive tax cuts promised to its citizens.
Let’s delve a little deeper into each of them to understand why this information is relevant to an average reader.
Brexit - Boon or Bane?
“Get Brexit Done” was the slogan that was largely responsible for Mr Boris Johnson’s victory in the 2019 election. However, only 3 years down the line, its full-blown repercussions have started to show up. In April 2019, multinational corporations transferred over a staggering $1 Trillion out of British banks and nearly $150 Billion worth of assets out of the country. To provide some numbers, the value of earnings from FDI went from £75.2 billion in 2018 to £43.8 billion in 2019. This was a decrease of an astonishing £31.4 billion between the two years and meant that the 2019 value was the lowest inward earnings since 2010[2]. The situation has not seemed to have improved by a significant degree since then.
The Pandemic
The COVID-19 pandemic no doubt shook the entire world off its feet. Global economies plummeted and Great Britain was no exception. Misfortune was written in the United Kingdom’s fate because the pandemic could not have struck at a worse time. Just as Britain was getting back up on its feet after the repercussions of Brexit, the pandemic struck the country’s economy back down on its knees.
There was a massive burden on Her Majesty’s exchequer at the time and eventually due to the prolonged impact of COVID-19 any hope of recovery was stubbed out.
The Russo-Ukrainian War
Though the Russia-Ukraine conflict affected the world economy as a whole, Britain was specifically affected differently as well. Being a significant member of NATO (North Atlantic Treaty Organization) the United Kingdom had to spend an incredible amount of money in providing defence equipment to Ukraine as part of its aid package.
Imperfect Decisions
The Mini Budget of September 2022 could perhaps be the flagship of imperfect decisions made by the British government.
To elucidate the budget a little bit, Finance Minister Kwasi Kwarteng announced the freezing of energy bills and a bewildering £45 billion tax cut, which was as practically impossible as it was absurd. Mr Kwasi Kwarteng believed if people had more money in hand, their purchasing power would increase. Consequently, they would spend more and ultimately that would result in more businesses being attracted to invest in the United Kingdom.
As one might have expected, what followed was quite the contrary. The markets became volatile, the currency depreciated and to mitigate the depreciation, banks had to increase their mortgage rates. Following this, Mr Kwasi Kwarteng was sacked after a short 38 days in office. In short, Britain dug itself a deeper hole with this Mini Budget, after all the troubles it had been through.
Conclusion
In conclusion, unforeseeable events and events out of the United Kingdom’s influence seemed to have conspired and wreathed havoc upon the British economy. However, true strength shines in adversity and it would be safe to say that even though the circumstances were grim, the representatives of the British government did not seem to choose and tread the best path to recuperation. Nations across the globe must observe and be wise to treat this as a lesson because, in truth, no nation knows whether they may be the next to befall this grim fate.
Article by:
Nischal Kashyap,
Training and Development team,
PES MUN Society, RR Campus.
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