Wednesday, December 7, 2022

The Truth About UK’s Failing Economy; Can One Woman Destroy GREAT BRITAIN?

The cost of living crisis in UK has put the country in trouble. The British Prime Minister Liz Truss is facing backlash from everyone – investors, public, and even people from her own party. The proposed Tax cuts could have caused a massive 100 Billion pound debt for the country. Great Britain is in Great Trouble. But can we blame one woman for the crisis or was the economic crisis inevitable? Let’s find out in this article.

This is what the Paris-based OECD believes. It is considered one of the most developed nations in the world. But because of the inflation in the country right now people have begun selling their belongings.

Is UK going the Sri Lanka way?

The British Empire, The sun never sets on the British Empire is now facing stagnation.

What is Stagflation? And how did the UK get to this point?

The story has 5 reasons or 5 parts which are interconnected. These 5 points give us the entire picture of the economy. Let’s understand all those reasons today.

And let’s think about it from an Indian perspective And if we want to stop a crisis like this, What Do We Need To Do?

Your time is valuable to us it will gonna be very interesting. So I would suggest you read the article till the end. But before there is the first piece of the puzzle!

I have a question for you, Japan exports cars, USA exports weapons and China exports viruses, What is UK’s main product? If I had to describe it in one word think about it.

London has been stable for the past 500 years! Wars have come and gone epidemics have come and gone, leaders have come and gone but London has stayed stable.

This stability attracts the top global banks. Big banks like HSBC, Barclays, Standard Chartered have their global headquarters in the city of London.

UK’s economy is deeply dependent on these financial services. This was going to collapse after the 2008 financial crisis.

Chapter 1: Recession – meaning a slowdown of businesses

People were losing their jobs, people did not have money to spend. Solution?

Push money into people’s hands. If you can’t do this directly, then do it indirectly. The housing loan would cost 6.3% to the borrower

This rate came down to 2.5% in a few weeks. The money that would have gone as interest payments remained in people’s hands to spend on other items

Their purchasing power increased! The overall demand increased. This is called Quantitative Easing in economics.

Reducing interest rates would be a temporary solution, right? Once the economy is back on track, the rates will increase, right?

The rates kept on reducing till a year ago, people could take loans out at 1.2%. This cycle was not sustainable. Come 2022, after 2 years of the pandemic, UK had to take corrective measures interest rates were the highest they have been in 14 years.

For an average family, they spent 27% of their monthly income or 1/3rd only on paying home loan interest. This additional burden has come in the last few months. So people were not prepared.

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Chapter 2: Brexit

The Britain that colonized a large part of the world. The same Britain remembered nationalism in 2016 and they broke their relationship with Europian Union (EU). Because UK was a part of EU, there were no barriers to trade. Plus there was free movement of people between EU. But now there is an additional barrier between these 2 things.

Every country needs skilled workers to grow. Skilled workers used to come from EU to work in the UK. These numbers reduced after Brexit.

Last year, many petrol pumps did not have fuel because there were no truck drivers to transport fuel. No fuel availability means, a delay in essential items reaching the markets.

This caused the prices of items to rise, this means inflation.

Because of Brexit and the interest rates, the cost of living in UK is rising exponentially

A BBC report says, consumer inflation had reached 10% in the month of August 2022.

Basic items like low fat milk was 40% costlier, Flour was 28% costlier, Cheese and yoghurt were 21% more expensive But why is there inflation in the first place?

There are 2 main reasons:

The first is when people have a lot of money and everyone wants to buy things

The second cause for inflation is, by the time goods reach the market, they are costly so fewer people can afford to buy them.

Chapter 3: Stagflation

Okay, so… The impact of a recession is there are no jobs. The impact of inflation is rising prices. What happens when we mix these two?

This means there is unemployment as well as rising prices. This is called Stagflation, where economic growth is stagnant on one side. The economic growth is quite slow but still the prices of things are rising sharply.

Where it would cost businesses Rs. 100 to make something and they would sell it for Rs. 110 to the customer and earn Rs. 10 profit in the process.

If you were to make the same items right now it would cost Rs. 150 and by selling the item for Rs. 155 to the customer. They are making a profit of Rs. 5 on each item.

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From the POV of the consumer, the cost is increasing, From the company’s POV, the profit is decreasing, Both sides are at a loss. Plus the other problems of recession are anyway there.

Chapter 4: The New Government

This was the foundation of the UK Economy. Before the Covid – 19 crisis and Russia Ukraine war. Before Boris Johnson’s Government fell, UK’s economy was not in a good state anyway and the situation was about to get much worse.

Who will be the PM after Boris Johnson? 2 big names came forward: Rishi Sunak and Liz Truss.

Rishi Sunak (Left) and Liz Truss (Right): via Getty Images

Liz Truss became the new Prime Minister of UK “I am confident that together, we can ride out the storm.” Her line of thinking was till the time businesses do not get relief.

The supply of items will not increase, and inflation will not come under control. Her campaign centered around all these issues. She wanted to prove she was different from the previous Govt and that she can take tough decisions and that’s where everything collapsed.

Her Chancellor (FM) introduced a tax package some points were quite controversial

The highest tax slab in UK is 45%. Tax was reduced for people who earned more than 150,000 pounds Plus as per the prior plan. Corporate tax was to increase from 19% to 25% from 2023. This Government put the tax increase on hold.

The people were already frustrated. They felt the new plan helped the rich save their money. The worst part is that the discounts that people were to get from the tax cuts.

Who was going to pay for those tax cuts?

Of course, the common man. Suppose it takes 100 pounds to run the UK economy, Where does this money come from?

From tax money, Tax cuts would have meant the UK got 80 pounds. So where will the balance 20 pounds come from?

Roads will have to be made, Government employee salaries will have to be paid, Oil will have to be imported, these costs will remain. So to make up for this deficit in revenues, the Government will have to take on debt, they will have to borrow money.

Chapter 5: U-turn Government

Because of these decisions, the people were not happy, IMF was not happy, Investors were not happy. The Opposition party was criticizing the new PM but their own Conservative party also criticised her.

To save her PM seat, Liz Truss had to take some U-Turns. The Finance Minister was fired.

The 45% tax bracket that was going to go, that would have benefitted only the rich people that will continue to stay and corporate taxes will rise from 2023.

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You remember in Chapter 1 we had said, UK’s biggest strength is their stability. Because of this whole situation,this stability has been impacted.

Investors started selling the pound So the pound weakened against the dollar. Bank of England was worried about the situation.

How do we get UK out of this crisis? Who will take charge?

Nobody has these answers! The UK is going through a perfect storm. That means whatever can go wrong in the economy, is actually going wrong.

Fuel prices are rising, Cost of living is rising, People are losing their jobs, Salaries are being cut. There is no EU support to conduct trade because of the Russia-Ukraine war. There are major supply bottlenecks and the new Government that has come in power is a little confused. Maybe the Government will fall!

This event is important because this event has lessons for a country like India.

The first is that we need international allies. No matter how strong India becomes in the future. We need to stay diplomatic with other countries. No country can be 100% self-reliant truly And for us, this dream is quite far away.

The second lesson is we need to thoughtfully, make our policies.

After the 2008 financial crisis if UK would have adjusted their rates before 2020 maybe they would not have to see this day. When policies backfire, We lose our credibility and we lose people’s support.

Many times because of poor communication good policies also do not reach the people

Number 3 is that there is NO FREE LUNCH! Nothing in the world is free.

The bill for everything has to be paid sometime in some form. If not this generation, then the next generation. What borrowing essentially means is, You are spending tomorrow’s money today.

India borrows 40% of its budget that’s why it is very important for us to know how our country works.

Final Words

If you got some value from this article, If we simplified complicated topics like stagflation & recession and you learned something new, Please share it with your friends, because in this connected world, We will have to learn what is happening around us.

We will have to learn from the mistakes of others and more importantly we will have to avoid making these mistakes and sharing this important message with you makes a difference to us!

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