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Britain’s Next Government Faces Uphill Battle to Revive Stagnant Economy


Britain’s Next Government Faces Uphill Battle to Revive Stagnant Economy


As Britain prepares for its upcoming election on July 4, the victorious party will inherit an economy mired in slow growth and constrained by high levels of debt. The world's sixth-largest economy has struggled to recover from a series of economic shocks, starting with the global financial crisis of 2007-09, followed by the 2016 Brexit vote, the COVID-19 pandemic, and a surge in energy and food prices in 2022.


Britain’s economic performance post-pandemic has been the weakest among the Group of Seven (G7) economies, excluding Germany, which was similarly impacted by soaring energy costs due to Russia's invasion of Ukraine. This sluggish recovery has exacerbated the gap in living standards between the UK and its European counterparts. Research by the Resolution Foundation, the Centre for Economic Performance, and the Nuffield Foundation reveals that middle-income Britons are 20% poorer than their German peers and 9% poorer than those in France.

Prime Minister Rishi Sunak, who faces a significant deficit in opinion polls, has attempted to boost voter confidence by highlighting recent economic improvements. In his election announcement, Sunak pointed to a drop in inflation to nearly 2%—a significant decline from its peak above 11% in 2022—as evidence that his economic policies are effective.


"Economic stability was only ever meant to be the beginning," Sunak stated. "The question now is how and who do you trust to turn the foundation into a secure future for you, your family, and our country."


The UK's GDP saw robust growth in the first quarter of 2024, and the reduction in inflation has opened the door for potential interest rate cuts by the Bank of England for the first time since 2020. However, the International Monetary Fund (IMF) projects modest growth of 0.7% in 2024 and 1.5% in 2025, far below the pre-financial crisis average of 2.75%.



LOW INVESTMENT, HIGH DEBT



The Labour Party, currently leading in polls, criticizes Sunak's Conservatives for presiding over what may be the first decline in living standards between national elections since at least the 1950s. Labour leader Keir Starmer has pledged to transform Britain into the fastest-growing G7 economy by boosting private investment, which he claims has been stifled by political instability post-Brexit.


Business investment in Britain remains below 2016 levels, contrasting sharply with a 14% average increase in other G7 countries over the same period. Despite optimistic rhetoric from both major parties, the next occupant of 10 Downing Street will face significant challenges in revitalizing the economy.


Public debt is at its highest since the 1960s, limiting the Conservatives' ability to implement further tax cuts and constraining Labour’s plans for borrowing to fund extensive green economy investments. Both parties are committed to reducing public debt as a share of GDP within a rolling five-year period—a target the current government is struggling to meet.


The IMF has recommended higher taxes and politically sensitive reforms to relax planning restrictions, which have hampered housing and infrastructure development, as necessary steps to address these economic challenges.


"Right now, too many businesses and households still face rising costs which delay investment decisions and dampen consumer spending," noted Rain Newton-Smith, head of the Confederation of British Industry.



LABOUR MARKET WOES



Britain’s next government must also address significant issues in the labour market. The UK is the only G7 country where the proportion of working-age people outside the workforce remains higher than pre-pandemic levels, contributing to slow economic growth and persistent inflation pressures.


Rob Wood, chief UK economist at Pantheon Macroeconomics, suggests that Labour's proposals could modestly boost growth, increasing Britain’s economic growth potential to 1.75% annually from 1.5%.


"The most sure-fire way of boosting UK productivity and potential growth would be a major improvement in the UK-EU trading relationship," Wood advised in a client note. However, Starmer has ruled out a major shift towards rejoining the EU’s single market or customs union, limiting the scope for significant enhancements in UK-EU trade relations.


As Britain stands at a crossroads, the path chosen by its next government will be crucial in determining whether the country can overcome its economic stagnation and achieve a more prosperous future.

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