What happened to the UK? What is driving the UK into economic impasse?

What is driving the UK into economic impasse?

In the middle of the 19th century, Britain took the lead in completing the Industrial Revolution, which provided the opportunity for the great leap of the capitalist economy, from an agricultural country to an industrial country, and become one of the world's great powers.

Now, inefficient social governance has struck the foundations of the British economy. According to available data, the UK has the highest inflation rate among G7 countries and the second lowest productivity growth.

Danyuk, deputy director of the Institute of Strategic Research and Forecasting at RUDN University and a member of the Russian Social Council, commented that Britain is in a systemic political crisis, which is first and foremost related to the fact that the people who govern the country "plunge the country into an economic stalemate."

The immediate cause of Truss's ouster was the "mini-budget". Data released by the Office for National Statistics showed that the consumer price index (CPI) rose 10.1% year-on-year in September. In late September, the massive tax cuts introduced by the Truss government ran counter to the Bank of England's tightening monetary policy, causing significant turmoil in UK financial markets.

In the face of severe inflation, interest rates should usually be raised and spending less, which of course means a decline in economic growth and less consumption. However, Truss's fiscal policy hopes to stimulate economic activity by cutting taxes for the rich, bringing about so-called "spillover effects", with tax cuts and spending increases occurring simultaneously. In addition, the UK turned to borrowing to fill the hole.

After many rounds of monetary expansion, the credit base of the pound became more and more fragile, so when Truss's policy was announced, the pound began to fall sharply, hitting a record low, government bonds were sold off, and pension funds faced a liquidity crisis. Despite subsequent remedial measures by the government and central banks, many problems remained, leaving the UK economy facing great uncertainty.

On October 19, the voting scene in the British Parliament was plunged into chaos, with shouting, insults and arguments playing out a drama of the decline of political parties after they lost the trust of citizens. Arguably, Truss's efforts to make up for the economic damage caused by the tax cut program have been futile and have had no effect other than prolonging the government's suffering, which has eroded to unprecedented levels.

The Financial Times wrote, "Britain's credibility has been undermined, and Truss's short six weeks as prime minister has undermined not only Britain's economic standing but also its reputation for political stability." The prospect of electing another Conservative prime minister without a general election ignores not only Britain's growing democratic deficit, but also the inadequacy shown by its miserable government. ”

At the same time, the Fed has repeatedly raised interest rates violently, attracting capital back to the United States, and Truss's operation is tantamount to accelerating capital outflow.

Under the headline "Conservative Party's Warning to American Republicans," the Wall Street Journal wrote that Truss "became a scapegoat for failed tax and spending policies." After a crushing defeat, Truss resigned as prime minister, but she was far from alone in her fault, and she became a scapegoat for economic policy mistakes during the Conservative Party's 12 years in power."

Statistically speaking, though, Britain has not yet entered the "Italian" Britain. After all, Britain has less debt than Italy and therefore a lower risk of default. The pound gives London some leeway when it comes to monetary policy. Nobel laureate economist Paul Krugman noted on social media that "Trussonomics is stupid," but also pointed out that "it won't cause a global crisis — for God's sake, Britain accounts for only 3.2% of world GDP." ”

The British are waiting for Sunak's financial plan

For Sunak, the youngest new British prime minister in nearly 200 years and former chancellor of the Exchequer, the current situation is a bad hand.

On October 26, 2022, in London, England, Sunak left 10 Downing Street to attend his first questioning meeting.

Compared with the previous Truss, the current economic situation is more severe, the party is more divided inside and outside, and the people's livelihood issues are more difficult and difficult... There are many questions about whether it can lead the Conservative Party to create life for Britain. Stuart Wilkes-Higg believes that whoever becomes the new prime minister must face real problems such as a large budget deficit, forced cuts in public spending, and the unfavorable British government debt in the international market.

Sunak is a right-wing conservative but relies on the support of the center-left wing of the party. He is a Brexit camp advocate and a low-tax freeport, but he has a higher popularity among Remain voters than other Conservatives. This may have something to do with the measures it has taken during the global coronavirus pandemic.

After the outbreak of the global new crown pneumonia epidemic in the UK, Sunak's finance department provided huge financial support to the British economy and avoided a sharp rise in unemployment, which won it a lot of praise. His signature measures include a mandatory furlough program and a "meal out to save the economy." Perhaps Sunak himself could not have imagined that his warning that Truss's unfunded tax cuts would fail would prove so quickly to be prescient.

However, Sunak does not have nostalgic capital, and he must face the costs of Brexit – lost trade and corresponding fiscal revenues – and find every possibility to make up for them elsewhere.

Sunak had promised to review or repeal all 2,400 EU laws that had remained in place within the first 100 days of becoming prime minister. How to deal with the Northern Ireland Protocol is also a difficult problem that the new government cannot avoid, and mishandling this issue may lead to tensions between the UK and the EU and even trigger a trade war. The protocol is part of the UK's "Brexit" deal. Under the agreement, Northern Ireland remains within the European Single Market and the EU Customs Union to prevent a land "hard border" on the island of Ireland, while some goods entering Northern Ireland from the British island of Great Britain are subject to customs and border security checks. After signing the "Brexit" agreement, the British side continued to express "remorse" on the Northern Ireland issue.

But fortunately for Bitlas, many important Conservative Party members, including Truss and rival Mordaunt, have publicly expressed their "full support for Sunak", and the unity within the Conservative Party has increased.

The British are waiting for Sunak's financial plan. However, as the Financial Times puts it, the prime minister's first contribution to the health of British society may be to do nothing, not do something.

It remains to be seen whether Britain's relationship with India will benefit as a result, and whether the market will react as Conservative MPs expect – gradually restoring confidence in the UK economy.