1 Derailed government finances:
With the UK undertaking higher spending to mitigate the pandemic’s impact, the ratio of revenues to current spending went from a surplus to a deficit of over 11 per cent of the national income within two years.
SOLUTION: Introduce spending cuts and increase government revenue by raising taxes, but selectively. However, higher taxes can impact investment and jobs.
2 Economic growth:
The economy has been stagnant since the start of the 2008 global meltdown. Brexit made it tougher for the UK to trade with its closest trading partners in Europe. GDP growth has been slipping—down to 0.2 per cent in Q2 of 2022 from 6.5 per cent in Q2 of 2021.
SOLUTION: A series of policy measures, including higher government spending, since private investment has not been forthcoming.
3 High inflation: The Consumer Price Index rose by 10.1 per cent in the 12 months to September 2022, with rising food prices making the largest contribution. Fuel prices increased by 26.5 per cent in the year to September 2022, with average petrol and diesel prices at 166.5 and 181.6 pence per litre in the month, respectively, compared with 134.9 and 137.4 pence per litre a year earlier.
SOLUTION: Put more money in the common man’s hands to help him tackle the high cost of living. A repeat of Liz Truss’s mistakes should be avoided—any tax cuts that benefit the wealthy will backfire. With the energy demand set to go up further in winter, pragmatic ways are needed to control costs by sorting out the supply-demand imbalance. On the monetary side, the Bank of England has already been raising interest rates to rein in inflation.
4 Revving up the stock
markets: The stock market has fallen sharply mid-October; the pound has been dropping steadily to the dollar. Bond yields—the returns a bond holder gets on investment in bonds—had gone up. Higher bond yields denote greater investment risk.
SOLUTION: Give clarity on the country’s fiscal situation—what the budget of the new government will be like. This will help boost sentiments both in currency and in the bond markets. Already, the pound has gained and bond yields have fallen since Sunak’s name was announced as the leader of the Conservative Party.