A sick economy

Any good doctor will tell you that when a person is sick, you need to treat the problem, not the symptoms. Your body has a high fever to kill the virus, it coughs and sneezes to discharge it, the problem is not the fever or the sneezing, it is the virus causing it. The same is true for an economy. When the economy has a high inflation rate and unemployment, a good chancellor needs to deal with the problem that is causing the symptoms and make sure they do not make the problem worse. But following the autumn statement and economic pledges outside of the statement, there is a desire to deal with the symptoms rather than the actual problem.

The Cost of Living Crisis. It has invaded our houses through our bank cards and our news and is here to stay for a while. It’s something that you will have heard mentioned a million times and is something you have most likely said yourself. Everything we do in life is becoming more expensive, in other words, inflation is hitting us. Inflation is reaching highs not seen in 30 years and is not decreasing as many have hoped. The figures stand at 11.1% rise in prices the past 12 months, for context this was at 4.2% 12 months ago. And yet this is not the only part of the cost of living crisis.

There has also been a real wage fall this year, as the cost of everything is higher than the rise in wages. Wages on average in the country rose by 6% this past year in comparison to the previously mentioned 11.1% and so the worth of a person’s wage has gone down. People are buying less and most businesses (but not all) are losing profit as a result. Combine people buying less and businesses losing out on profit and you get a country in recession. Whilst inflation is a problem for many, it is only a symptom of wider problems.

Problems of the UK

Firstly there’s the Ukraine war. Russia during the war has restricted grain exports from Ukraine. Ukraine is known as the breadbasket of Europe as it supplies a massive proportion of the world’s wheat and sunflower seeds meaning the price of bread and pasta and other wheat-related products are rising some of the most in prices. There is also the increase in price of fertiliser exports revealing the world of interdependence of trade countries have with each other. Russia supplies most of the world’s fertiliser which food supplying countries such as in South America rely on to grow their crop. Countries are buying less from Russia but as a result have higher costs, they sell agricultural products at higher prices which are passed on to UK consumers meaning that even fruit and vegetables have now gone up in prices.

Energy bills are one of the biggest parts of inflation people are seeing. Russia supplies most of Europe’s Gas and therefore most of their energy, but this changed once the war started and when Europe imposed sanctions on Putin’s war, Putin imposed tighter gas supplies to Europe. This has caused wholesale prices to rocket, but the UK does not rely on Russian Gas. We mainly get our supplies from Norwegian companies which get their Gas straight from the Norwegian seas and so their costs are not massively affected by the war. But because the way prices are set by the market in general, they get to charge higher prices.

Secondly there’s us, the consumers. After Covid when we could go out and get back into some of our normal spending habits, we caused an uproar in demand, businesses all of a sudden had to supply more than they did during Covid causing a backlog in ports and supply chains around the world with the logistics of getting our goods to our shelves costing businesses more than they had anticipated as a tsunami of spending came about. Supplies slowed down and time is money so businesses started paying more to get their goods thus causing prices to increase.

Brexit’s hand is in this as wellt. It hasn’t caused inflation as such, but it hasn’t helped. It’s tougher for goods to get into the UK as more legislation needs to be adhered to and less business have been able to do business as well, the two things that have made supplies harder to get. We should have lower inflation in comparison to other countries because we do not rely on Russian gas as much and because we have our own central bank which can try and control our inflation, yet we have some of the worst inflation in Europe, worse than Germany.

The Government’s purse

Our economy is going through a lot, and the government has its own spending problem. In economic terms Fiscal policy refers to government finance. How the government gets taxes through taxes and how it spends it. During covid, eye-watering levels of borrowing took place as the government had to borrow money to keep the economy from completely collapsing, resulting in £323Bn being borrowed and massive debt. Now government debt is different from personal debt. Bailiffs don’t come knocking on 11 Downing Street. But the government does have a credit score, and if the government borrows too much it finds it is harder to borrow in the future as lenders trust the government less to pay it back. It also becomes more expensive to borrow money as the government needs to pay a certain amount every year. The larger the debt, the more that needs to be paid back and so the more tax that needs to be raised.

Inflation, a war in Ukraine, businesses struggling, families struggling and a government heavily in debt. This is what faces the UK government and is by no means an easy task with the best of economists struggling. With a wave of problems facing the UK economy, Sunak’s government has been trying to keep the boat stable and is trying to be the opposite of Truss and Johnson and keeping out of the media’s radar. A hard thing to do in current times with so much going on. But Sunak’s strategy is prevalent in the Autumn budget. It didn’t do anything big. Taxes are going to go up but even then only in subtle ways. The amount you pay is staying the same, but the threshold is being frozen so as wages rise it means that more people are incorporated into taxes or move into higher forms of tax, and the top rate payers now need to earn £125k rather than £150k start being taxed 45%.

Cuts to public spending were widely expected, but instead the chancellor promised that there would be a real term rise in public spending every year for the next five years, just slower than before. This means that the government will raise public spending more than the rate of inflation every year. Nevertheless, these don’t help the problems, of course the Ukraine war is massive and not solvable overnight, neither is business supply chains and people’s empty pockets, but fixing the government’s purse does not even try to begin solving these.

Another thing, the bigger picture, was ignored in the autumn statement. The fact that the UK has been uncompetitive in the world for the past decade. We have the lowest growth in the G7, a collection of some of the 7 biggest economies in the world. We have had low productivity and weak growth in disposable income for families across the country in comparison to the labour years under Blair. 12 years under the same party and we are no closer to seeing what the future holds for the UK’s economy.

For the past few years it has been about staying afloat and managing every wave that hits us, yet, we now find ourselves drowning, proving that ineffective as well. This is an opportunity to do something that has not been seen in the UK since the labour years over a decade ago, a vision. A long-term health plan. We’re technologically behind and we have lost our major trade deals with Europe. We before covid needed better supply and now we need it more than ever, as supplying to consumers becomes cheaper so do the prices that business charges us. Growth has no use if we become lone wanderers in an increasingly competitive world. Witch doctors might make people feel better, but they do not heal them.