She says high inflation will continue to weigh on household incomes as the government raises taxes and the Bank of England raises interest rates.
The result will be a downright bleak economic climate. Domestic spending is weighed down by falling real incomes, the export environment is difficult and business investment is drying up as companies become increasingly cautious about the outlook.
Sunak, of course, does not have clean hands. He presided over the economy and massive spending for nearly three years. But Liz Truss’ 49 days made a bad situation even worse. And Britain looks like the sick man of Europe again.
Former Bank of England government Mervyn King offered free advice to politicians around the world over the weekend when he said it was “time to be at the forefront”.
“Have a story explaining to people the consequences of a) increasing inflation; b) confronting Russia and supporting Ukraine, which has lowered our national standard of living; and c) the need to help future generations cope with the increased public debt we leave to them,” King told the BBC, adding that taxes will have to rise if government spending stays at the same level.
Sunak seems to have drawn a line under the delusions of recent years and paints a story about how he will deal with the problems.
While acknowledging Truss’s “restlessness to create change”, he said “some mistakes were made”.
“Not born of ill will or bad intentions. On the contrary. But mistakes nonetheless,” he said, admitting that it was now his job to “fix them.”
“The government I lead will not leave the next generation, your children and grandchildren, with a debt we were too weak to pay on our own,” he said.
The task is immense because the underlying factors of Britain’s decline have been left unaddressed for too long. Economic growth has been low for most of the past decade.
Poor productivity has been a major factor behind the limited growth in gross domestic product, the measure of the amount of goods and services produced, and a flat line in average real wages.
Britain isn’t the only country experiencing a slowdown in productivity growth, but the UK’s record is one of the lowest in the G20. All this has been somewhat masked by the fact that unemployment has continued to fall and employment has risen.
Unemployment fell from nearly 8.5 percent in 2011 to just 3.9 percent on the eve of the pandemic in 2020.
Sunak’s move to No. 10 is a step back to sanity, but no one should doubt the magnitude of the challenges ahead.
Short-term concerns aside, there are many long-term concerns about the economy – the cost of Brexit, a lack of a skilled workforce and a lack of investment in both public sector infrastructure and business investment, which would boost competitiveness and productivity.
Companies exporting to Europe are now faced with an increase in regulations, customs forms and duties for the sale of goods in the EU. The Office for Budget Responsibility claims the effects of Brexit will reduce GDP by 4 percent – this is up to £100bn ($179bn) in lost output and £40bn ($71bn) less revenue for the Treasury.
Sunak has acknowledged the task. And at a time when Brits are tired of being treated like fools, getting on with the job and fixing everything may well be the only choice he has.
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