The U.K. has a long history of world-changing inventions, including the marine chronometer, the reflecting telescope, the steam engine, cement and—my favorites of all—cricket and football.
Britain’s world-leading days are long in the past. Years of turmoil have left the once-innovative nation directionless and struggling to keep up with the rest of the world. That is the backdrop as U.K. voters go to the polls on July 4.
The health of the British economy will be top of mind for voters. The U.K. has struggled to establish momentum since the pandemic ended; real output has lagged behind that seen in other large developed countries. The economy sank into a technical recession in the second half of 2023. Though a recovery is taking shape, the outlook is not particularly bright for the next few quarters.
Some of Britain’s problems are familiar: all advanced nations are reckoning with aging populations and climate risk, and all European states were set back by the energy crisis stemming from the Ukraine war. But the U.K. has been further impaired by Brexit. Departure from the European Union (EU) has been costly: goods trade has fallen sharply in the last five years, as predicted by those who opposed the move.
The U.K.’s stock market has fallen out of favor because of the lackluster economy it represents. Though London remains an important financial center, it is no longer home to Europe’s biggest bourse. Britain’s share of global market capitalization has fallen from 8% to 3% in the past two decades. The pound has lost 14% of its value since the Brexit vote in June 2016.
Weak growth, a cost of living crisis and lackluster productivity gains have widened the gap in living standards between the U.K. and other European nations. Inflation peaked at 11.1% year over year in late 2022, the highest among developed countries; this severely diminished consumers’ spending power. Real pay for Britons has barely increased since the global financial crisis (GFC).
Underinvestment by the private sector, partly a product of Brexit-induced uncertainty, also explains Britain’s sluggish growth. Business investment in the U.K. ceased growing after the referendum, surpassing its 2016 level only last year. By contrast, other major advanced economies experienced a 14% average increase over the same time period. Investment accounts for 19% of U.K. GDP, the lowest among major advanced economies.
High mortgage costs are also on voters’ minds. At the start of 2024, investors were pricing in as many as six quarter-point cuts by the Bank of England this year, but now see less than two. This will be disappointing for British households hoping for relief on their house payments. Five million have already seen their monthly installments jump since policy tightening began in late 2021; another one million will join them by the end of this year. Mortgage payments as a share of household disposable income are higher today than in the decade before the GFC.
MARKETS WILL NOT ACCEPT A LOT OF FISCAL EXPANSION.
All of this unfortunate economic news, along with disenchantment at Tory leadership over the past 14 years, have provided the Labour Party with a substantial lead in the polls. That has raised concern among pro-business groups, but their fears may prove overdone. The current Labour leader, Kier Starmer, is much more moderate than his predecessor.
Among the elements of the Labour platform are about £8.5 billion of tax increases and further closing down tax breaks for non-domiciled persons. This is a modest amount. There are few signs that large-scale spending increases are on the horizon.
These temperate proposals are the result of high levels of debt that constrain Britain’s fiscal flexibility. Attempts to be aggressive with taxes and spending could risk punishment from the financial markets; the “mini budget” fiasco of 2022, which created the shortest tenure of any prime minister in history, is serving as a cautionary tale to both sides. It might also serve as a warning to other markets, including the United States.
Both parties have committed to bringing the ratio of debt-to-GDP down in the fifth year of the official forecast as prescribed in the fiscal rules. To achieve this end, public investment may have to be cut over the next few years, which will likely mean a continuation of lackluster productivity growth.
The Labour party also seeks closer ties with the European Union. Establishing better trade relations will help British industry and aid in the fight against inflation. Some hope for a referendum to rejoin the EU, but Labour has ruled that out for the time being. Those on the other side of the English Channel may not offer a warm welcome, given the tone of parliamentary elections in Europe.
As the British economic reformer Richard Cobden wrote almost two centuries ago: “our only chance of national prosperity lies in the timely remodeling of our system.” Cobden pushed for measures that supported trade and brought the U.K. into its world-leading era. Today, further reforms will be needed to offer hope that the U.K.’s best days are not forever in the past.
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