Market Analysis

Slow growth and heavy debt: the fragile UK economy awaiting election winners

Amos Simanungkalit · 19 Apr 20249.9K Views

Britain is gearing up for a national election amidst persistent economic challenges such as slow growth, high debt, and limited fiscal space. Prime Minister Rishi Sunak assures the public of progress in addressing the cost-of-living crisis, while the opposition Labour Party criticizes the Conservatives for overseeing years of economic stagnation.

The UK's economy has struggled since 2010, with growth mainly bolstered by significant migration. However, GDP per capita has remained stagnant since early 2022. Despite Finance Minister Jeremy Hunt's assertion that Britain outpaced some European counterparts in overall growth since 2010, the country's economic performance, particularly since the onset of the pandemic, has been lackluster compared to its G7 peers.

Productivity growth has been a major hurdle, attributed to low business investment, Brexit-related trade barriers, inadequate public investment, and skills training deficiencies. Both major parties pledge measures to enhance productivity, with the Conservatives focusing on tax incentives for business investment and Labour emphasizing investment in green technology.

Flatlining wages and declining real household incomes have exacerbated economic woes. British workers' wage growth has trailed behind that of most G7 nations over the past two decades. Reports indicate a significant income gap compared to peers in Germany and France.

Public spending surged during the pandemic but is projected to tighten in the coming years, potentially straining essential services like healthcare and education. The government's fiscal plans hinge on further spending cuts, which experts doubt are feasible given existing pressures on public services.

Taxation is a contentious issue, with Britain's tax burden reaching post-World War II highs. Sunak aims to build on recent national insurance rate cuts, while Labour pledges to maintain current tax rates. However, balancing public service improvements with fiscal stability remains a challenge for both parties.

Public debt has soared due to pandemic-related expenditures and energy price surges. Both Conservatives and Labour aim to reduce the debt burden over a five-year period, although achieving this seems challenging amidst calls for increased spending and conflicting tax policies.

Addressing the high number of inactive workers could stimulate economic growth and bolster government revenues. Britain remains the only G7 country where the proportion of working-age individuals outside the workforce exceeds pre-pandemic levels, hindering economic recovery and fueling inflation concerns.