The British economy has reached a critical inflection point.
In 2020 GDP fell by a record 9.8% and the UK suffered one of the deepest drops in activity among developed nations, thanks to a combination of high infection rates, lengthy restrictions, and a reliance on consumer industries. Fortunately since the turn of the year, things have begun to look rosier: half of all adults have now been fully vaccinated and most businesses are expected to return to full operation by June.
A rapid rebound, relative to other nations, was always on the cards following the UK’s deeper crash. That said, the damage done by the pandemic has also been less pronounced than first expected. The unemployment rate is now likely to peak at just over 6%, rather than the 12% first projected when the pandemic took hold. Businesses have also been holding up better than many feared, with a drop in annual insolvencies in 2020. Chancellor Rishi Sunak’s £350 billion Covid package, which included loans, grants, and reliefs, and a flagship furlough scheme to keep workers tied to their employers, has been doing much of the heavy lifting.
The eleventh hour Brexit deal on Christmas Eve also avoided a potentially damaging no deal and new tariffs with the UK’s biggest trading partner. Even so, many businesses have still been grappling with new non-tariff barriers, including hefty new paperwork and customs procedures. Some 20% of members of the Institute of Directors, a UK business organisation, had halted trade with the European Union as they came to terms with the new arrangements. Brexit is also by no means over. Further negotiations are required on services trade with the EU, which accounts for 40% of the UK’s total services exported.
Nonetheless, the uncertainty that lumbered businesses’ investment plans, and the Government’s long-term agenda, has now largely dissipated. The UK can now more broadly explore how it seeks to flex regulations outside the European Union and reach new trading partners. With light at the end of the Covid tunnel, ministers can also begin shaping what Boris Johnson touts as a moment to “build back better” from the pandemic.
The real challenge for the Government, however, will be moving from a decade of short-term crisis management, involving the financial crisis, Brexit, and Covid-19, to one of long-term thinking.
There are several intersecting areas of economic policy to be addressed. For starters the UK is yet to remedy the low investment, low productivity era that kept living standards down across the country after the 2008 recession. Then there are questions about how it will capitalise on any opportunities outside the EU. And finally, it will need to develop its net zero strategy, digital growth agenda, and reflect on inequities made more apparent by the pandemic.
Since the turn of the year the Government has begun setting out its intentions with a Plan For Growth and an Industrial Decarbonisation Strategy. It has also been consulting on how to reshape its subsidy regime and regulatory framework now that the UK is outside the EU. Alongside extending emergency support to keep the economy ticking over until restrictions are lifted, Mr Sunak’s Budget in March included incentives for digital, training, and capital investments, which could help turn the dial on the country’s woeful productivity growth.
But for all the new papers, consultations, and announcements, businesses and investors are struggling to see an overriding framework behind the Government’s plans. It recently ditched its 2017 Industrial Strategy, which previously collated all its economic plans, and the council that was intended to provide long-term accountability of it. While buzzwords like “levelling up” and “build back better” have helped stoke optimism, the detail on policy remains somewhat confusing.
Recent efforts have also overlooked important areas. Firms will need more support to adjust to Brexit, and to redraw their supply chains to benefit from the Government’s somewhat hazy ‘Global Britain’ ambitions. The Budget was also lacking in support for UK scale-ups. While this country has become a hub for digital and fin-tech start-ups, skills and financial barriers have prevented the development of anything close to the Silicon Valley titans. As the host of the UN’s COP26 summit this year, the UK’s green agenda could also do with more fleshing out.
Money is also a factor. While Mr Sunak has kept the fiscal taps flowing to bridge the economy through the pandemic, he is now eager to pay back what is the highest peacetime budget deficit on record and to keep debt – now nearing 100% of GDP – under control. Indeed, the Chancellor has already outlined plans to hike corporation tax from 19% to 25% in two years’ time, which would still leave the UK with one of the most competitive corporate tax rates in the G7. But it does beg the question of how the UK will finance its post-Brexit and pandemic plans, alongside mounting long-term expenses owing to an ageing population.
The UK is expected to follow 4-5% GDP growth this year, with a breakneck rate of 7% in 2022. Much of that will be owed to pent-up consumer spending, while businesses may tap into fiscal incentives and low interest rates to invest. Beyond that, whether the UK’s economy will return to its old ways will depend on the Government’s ability to execute on its ambitions. Right now, after Brexit and Covid-19, Westminster’s energy and finances are running thin, but the hard work is only just beginning.
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