The United Kingdom economy, once a powerhouse at a global level, is now hitting new nadirs on a daily basis.
High inflation, a mortgage market crisis and last but not least, a cost of living crisis have now been rocking the nation since last year. “The Sun never sets in the British empire” used to define the country during the 20th century, and in 2023, the same Sun is setting fast on the former colonial powerhouse’s economic landscape.
The economy shrank by 0.1% in May 2023. While the extra bank holiday for the King’s Coronation partly contributed to this stat, there is no denying the fact that the rising cost of living and higher interest rates have been squeezing households and businesses.
How bad is the situation?
The latest UK inflation ratio stands at 8.7%. The Bank of England has been putting up interest rates to try to slow price rises but this is negatively impacting the consumer borrowing costs, by driving up mortgage and loan repayments.
As per the analysts, Britain’s economic growth will fall further behind the euro area by 2024, and inflation will remain stubbornly high.
The United Kingdom’s Institute for Public Policy Research believes that the decades of underinvestment by the government and businesses have left Britain’s economy in a growth “doom loop.” As per its estimates, the country has contributed $500 billion ($638 billion) less to global business investments compared to other wealthy countries.
Also, the half-a-trillion-pound spending shortfall has now resulted in the European country ranking behind all other G-7 countries, and puts it 27th out of the 30 OECD nations, with only Poland, Luxembourg and Greece investing less.
The IPPR stated that the UK underinvested in infrastructure, research and development, skills and training, since 2005. The private sector investment in the last 19 years should have been $354 billion higher in real teams, while public sector investment should have been $206 billion more.
IPPR’s estimates on the UK underinvesting can be summed up by the fact that the Rishi Sunak government has now offered millions of public sector workers a pay raise between 5% to 7%, after the country witnessed one of its worst bouts of industrial strikes from 2023 beginning. However, the country’s Treasury has now warned that the increases in public sector pay will need to be funded by spending cuts elsewhere in UK government departments.
On one hand, we have the country’s public spending on information technology doubling to reach £17.3 billion ($21 billion) over the last five years, on the other hand, the present economic situation will force the Sunak government further to restrict their spending for the 2023/24 financial year, as departments will have to be content with cost-cutting and restructuring moves.
Coming to the mortgage market, as per a charity named ‘Citizens Advice Cornwall’, people in the South-West part of the country have no money left to pay their mortgage bills further. Those already struggling with their mortgages since 2019 now reportedly have about £60 a month left in their bank balance, with many of them missing their monthly budget marks on a regular basis.
The Bank of England in June 2023 hiked interest rates by 50 basis points to 5%. The central bank’s 13th consecutive rate rise took the base rate to the highest level since 2008 and the move is now affecting British homeowners as the interest rates on many mortgages are directly linked to the central bank’s base rate. Renters, too, are witnessing their payments increase as buy-to-let landlords pass on higher mortgage repayments.
Research by the National Institute of Economic and Social Research has also estimated that the BOE’s latest interest rate hike would see 1.2 million U.K. households (4% of households nationwide) run out of savings by the 2023 end because of higher mortgage repayments.
Also, throw the ongoing cost of living crisis in the mix. The Office for National Statistics said three in 10 people it surveyed were using savings because of the rising cost of living, as millions of households have been facing sustained pressure from soaring prices for groceries, energy and other basic essentials.
Highlighting the intense pressure on families, the ONS said one in 20 households had run out of food in the past and couldn’t afford more. Almost half of adults said they were spending more than usual to get what they usually buy, or had resorted to buying less food, said ONS.
Another research from Kantar suggested that households were changing to cheaper supermarket own-brand products.
The news of UK households struggling against the inflation of food items and other daily necessities has been dominating the headlines since 2022, and unfortunately, things will follow the ongoing trend in the coming days too.
All these crises have led to the household wealth across Britain to fall by £2.1 trillion, the biggest drop since the Second World War, with falling bond prices cutting the value of pension assets. As of now, the situation is such that news around mortgage rate stabilising or the slightest fall in the overall inflation ratio is being met with rousing cheers.
Brexit has its contributions too
As part of its exit from The European Union, the UK left the single market and customs union in 2021, thus resulting in companies trading with the EU facing new rules, new paperwork and new checks on some goods. While official figures suggest that the UK’s export volumes to Europe have recovered to the pre-pandemic levels, a British Chambers of Commerce study saw more than half of the surveyed firms grappling with the new trade system. The red-tapism is not helping small exporters either.
Academics at the London School of Economics suggested that the price of food imported from Europe rose, maybe by as much as 6% between 2020 and 2021.
While most of the G7 nations’ trade figures recovered from the COVID setbacks, the UK has been a different story, as its overall export figures have been on the declining path. Stats suggest that the nation’s exports decreased by 2.6% month-over-months to 68.41 billion pounds in May 2023, the lowest level since June 2022.
Sales to the European Union too went down by 6.8%. While 71 trade deals have been struck, including the ones with Australia and New Zealand, experts believe that these pacts won’t add much to the UK’s economic resurgence, if there is any.
Also, investments have stalled too. As per the think tank ‘UK in a Changing Europe’, had the country still been a part of the European Union, the investment ratio from the European companies would have been 25% higher than the 2016 numbers.
We have legendary Sir Richard Branson stating that the cost of Brexit red tape will make businesses hesitate before investing in the UK. A lack of investment will result in the country turning into a less-efficient, lower-earning economy, which will further affect its recovery and growth prospects.
Can Sunak afford a Bazball here?
The United Kingdom’s cricketing circle has been abuzz with the term ‘Bazball,’ referring to the aggressive style of play the England cricket team has adopted in Test matches since 2022.
The ‘Bazball’ style involves taking decisions in balancing between attack and defence. You have England scoring close to five runs per over in the longest format of the game, absorbing the pressure and then putting it back in the opposition’s mind. Skipper Ben Stokes hasn’t been hesitant to declare his team’s innings during day one of a Test match, just to have a crack at the opposition batters in the last few overs of the day.
England in the summer of 2022 won all four encounters chasing in excess of 250 runs, thus becoming the first English side to ever win four consecutive Test matches batting last. Out of the 16 games captained by Stokes so far, England have won 12.
The approach of Stokes and coach Brendon McCullum (whose nickname is Baz) is simple. Be attacking and unconventional, have a win-at-all-costs mentality, no fear of failure and last but not least, make the best use of the available resources as per the game situations.
Now given the fact that the UK PM himself is an avid cricket lover, he needs to draw some inspiration from the Bazball.
Now let’s look back at Sunak’s career as the Chancellor of the Exchequer, from 2020 to 2022. During the COVID period, he introduced a programme providing £330 billion in emergency support for businesses, as well as a furlough scheme for employees. The ‘Coronavirus Job Retention Scheme’ was a potent weapon against bankruptcies and potentially high unemployment levels feared during the pandemic period.
Sunak also unveiled a plan for a further £30 billion of spending which included a stamp duty holiday, a cut to value-added tax (VAT) for the hospitality sector, a job retention bonus for employers and the ‘Eat Out to Help Out scheme’, to boost the hospitality industry. The UK government subsidised food and soft drinks at participating cafes, pubs and restaurants at 50%, up to £10 per person, under the scheme.
The ‘Winter Economy Plan’, introduced by Sunak on 24th September 2020, aimed to further promote economic recovery while preserving jobs and businesses which were considered viable. This came in handy during the lockdowns and trade disruptions throughout 2021.
In 2021, Sunak’s budget also saw substantial spending promises related to science and education. The budget also increased in-work support through the Universal Credit system by increasing the work allowances by £500 a year, and reducing the post-tax deduction taper rate from 63% to 55%.
While the Budget drew criticism from the House of Commons, Sunak defended it as groundwork “for a new British economy.”
As the cost of living crisis started taking a worrying shape in 2022, Sunak responded with a £5 billion windfall tax on energy companies to help fund a £15 billion support package for the public.
The package included every household getting a £400 discount on energy bills, in addition to a £150 council tax refund. For about eight million of the vulnerable British households, a further £650 payment was announced. Pensioners and those with disabilities would qualify for extra payments further.
During his spring statement on 23 March 2022, Sunak cut fuel duty, removed VAT on energy-saving equipment and reduced national insurance payments for small businesses and, while continuing with a planned national insurance rise in April. He also promised to align the primary threshold with the basic personal income allowance as of July 2024, apart from announcing income tax reductions in 2024.
After Liz Truss took over the governance responsibilities from Boris Johnson, for a 50-day disastrous rule, Sunak’s roadmap for the ‘new UK economy’ got derailed.
Just like how ‘Bazball’ revolves around being proactive, unconventional and positive from the word go, so was Sunak’s vision of the British economy.
“Rishi Sunak is a cricket fan and in his early days as Boris Johnson’s chancellor, he was a strong advocate of an economic form of Bazball. This was early 2020 and, in truth, the Treasury and the Bank of England had no choice but to throw caution to the wind because a global pandemic was raging. Sunak borrowed more than any other peacetime chancellor so that furloughed workers still received wages. The Bank cut interest rates to a record low of 0.1% and pumped billions of pounds into the economy through its bond-buying programme known as quantitative easing,” commented British journalist Larry Elliott, while explaining Sunak’s economic approach, in a Guardian article.
“To the extent that it prevented a health emergency from turning into an economic meltdown, the just-go-for-it approach paid off. Now, though, there has been a return to a more safety-first approach and the Treasury and the Bank are playing with the straightest of bats. Taxes have been raised in an attempt to reduce borrowing. Interest rates are being increased to choke off inflation,” Elliott added further.
The bigger and tougher picture
The analysts believe that the UK inflation will start its “cooling off” phase, but the ratio will be much higher than in the eurozone, where it slowed to 5.5% in June 2023, and in the United States, where it dropped to a two-year low of 3%.
While Andrew Bailey, the Bank of England Governor, agreed that the inflation will start cooling off from June 2023 onwards, he justified the central bank’s decision to keep on raising interest rates. Critics are now saying that BoE failed to act quickly and decisively enough to tackle rising costs, While Bailey insisted that the Monetary Policy Committee would remain committed to the task of returning the inflation to 2%.
The markets are now expecting the Bank will continue raising the interest rate, to as high as 6% to slay the demon named ‘inflation’.
However, it will take a toll on the families looking to refinance their mortgage loans over the next 18 months, as the rising interest rates will result in rocketing monthly bills. Add the Sunak government’s austerity measures too, and you have a public sector crippled by spending cuts.
England’s cricketing culture was known till a few years back for being too ‘conventional’, lacking innovation and positivity. The first-round elimination during the 2015 World Cup brought the much-needed sporting revolution in the European country and now you have a side being hailed as the reigning 50 and 20 overs world champions and the attacking intent is now percolating in the game’s longest format too.
Pitching a ‘Bazball’-like approach to sort out the UK’s ongoing economic mess may look like a far-fetched thought, but just like how the country used to play the ‘safe’ cricket till 2015, it is taking the conventional route of hiking rates and implementing austerity measures. These steps have only piled up pressures in the country’s crisis-ridden mortgage market and public sector.
Sunak hit the headlines during the COVID period as he led the UK government’s efforts to mitigate the pandemic’s effect on the domestic economy. Yes, most of the schemes introduced by him were unconventional and drew criticisms, but the intent was important there.
The ongoing economic crisis requires one more similar ‘unconventional yet positive and proactive effort’ from his government, just like how ‘Bazball’ has taken the cricketing world by surprise, apart from infusing a new life to the game.