UK Financial Crisis

What is the issue?

A toxic mix of politics, inflation and higher interest rates is threatening the financial system in the U.K., sending a shock wave through global markets.

What about the status of the UK economy?

Historic inflation- Between February 2021 and August 2022, UK gas prices shot up higher than the prices experienced at any time in the past.
Stagnant growth- The UK’s economy has largely been stagnant since the global financial crisis of 2008.
Between 2007 and 2020, the UK’s GDP has grown from 2.73 trillion dollars to 2.89 trillion dollars.
Currency- The pound sterling has rapidly lost value against the dollar and fallen to a 37-year low.
Underinvestment- Britain has one of the lowest shares of investment in GDP of any of the rich economies of the world (15-16 %).
Covid pandemic- The UK economy has still not recovered to the pre-pandemic level.
Energy crisis- Europe as a result of Russia’s war on Ukraine and tensions in global gas markets worldwide is suffering an epic energy crisis.
Brexit- It has generated inefficiencies which will cost GDP, thus providing very little incentive for investment.
The Mini Budget- The announced measures are likely to require new government borrowing.
It has deepened anxiety about Britain’s public finances.

Recently, India overtook the UK as the fifth-largest economy.

nominalgdp

What did the new mini Budget announce?

Inflation targeting- To contain the inflation, a freeze on energy bills was announced.
According to the government, this will reduce inflation by as much as 5 % points.
Kick-starting the economy- The government has decided to scrap the 45% top rate for high earners.
These tax cuts will benefit all taxpayers (individuals and companies) to varying degrees.
The government’s idea is to leave people and companies with more money in their hands.
It is expected to boost consumer spending as well as incentivise businesses to invest in the economy, creating a virtuous cycle of rapid economic growth.

Why was the mini budget criticized?

Government borrowings- The package comprises about 5% of the country’s GDP.
The energy support and the weaker economic outlook will increase the borrowing.
Interest rates- Since, the UK’s economy is facing the prospects of stagflation, the interest rates will rise.
Economic growth- The markets are not convinced that growth will happen at the pace the government hopes for.
Investor confidence Investors doubt the UK government’s ability to pay back the money.
They are unwilling to lend money to the UK, which, in turn, is reflected in the selling of UK government bonds.
As a consequence, gilt yields are shooting through the roof.
Cost-of-living crisis - The mini-Budget may end up in the cost-of-living crisis in the UK.
Inflation- More money in the hands of the people could fuel spending and inflation.
Imports- The sharp weakening of the pound’s exchange rate will make imports (especially energy) costlier.
Inequality- The International Monetary Fund (IMF) is reported to have said that the new UK Budget would disproportionately benefit the wealthy, thereby increasing the inequality in Britain.
Reaganomics- The announced tax cuts have drawn comparisons to the tax policies of US President Ronald Reagan.
Starving the beast strategy- The idea is that if the expenses of corporations are reduced, the savings trickle down to the rest of the economy.
British Prime Minister Liz Truss said that her government will not reverse the economic plan despite the turmoil in the financial market.
Britain, once a glorious imperial power where, the sun never sets, is now a country, post Brexit, that’s fast losing its status, economically as well as geopolitically.

starvingthebeast

References

Quick facts

Stagflation- Stagflation is an economic condition that is caused by a combination of slow economic growth, high unemployment, and rising prices.

Gilts- Gilts are bonds that are issued by the British government and generally considered low-risk equivalent to U.S. Treasury securities.

ARCHIVES

MONTH/YEARWISE ARCHIVES