Brexit is not the only factor that is affecting the British economy at the moment. It is no longer the most important issue for the country. It just seems like a convenient issue to cite in order to justify the low productivity that has plagued the nation in recent years. No matter how big that decision is, there are other things as well that Britain needs to focus on to improve its stagnating economic condition.
The recently introduced skills-focused points-based immigration policy by PM Boris Johnson is going to have a huge impact on the economy. More than one-third of doctors, pharmacists, and dentists in the UK are foreign-born, as are more than 20% of nurses. Seven in 10 workers in the meat-processing industry are from the EU. However, next year onwards, the UK’s Byzantine immigration system for non-EU migrants will also apply to those from the EU. While immigration criteria for skilled labour will be loosened, it will be almost impossible for non-skilled labour to obtain a work visa. One of the hardest-hit sectors will be ‘care for’ the elderly. There is already a shortage of workers in this sector. Moreover, ‘care for’ work is the occupation with the most projected employment growth in the coming years. The UK under the guise of treating EU and non-EU migrants equally on the basis of skills is actually turning away industrious and enterprising individuals who help power its economy and provide for the basic needs of its greying population.
This is one of the recent examples of what the British government is doing wrong. There are certain structural problems as well that need to be addressed. Capital spending as a share of GDP has fallen to around 17% from 20% in 2007. Capital investment is required in order to ensure long-term economic growth by increasing future production capacity. Moreover, the expenditure on R&D remains persistently below 2% of the GDP. In addition to this, the output per person has remained well below than what would have been termed as satisfactory. The unemployment figures have been relatively good recently, however, these have come at the cost of stagnating real wages and lower labour productivity per hour. Moreover, there has been a constant increase in the number of zero-hour contracts. In such contracts, the workers have no guarantee of how many hours of work they will be getting. This could be one of the major reasons for under-employment in Britain.
At the end of 2019, the manufacturing activity took a turn for the worse with the sharpest deterioration in output in more than seven years. The IHS Markit/CIPS manufacturing Purchasing Managers’ Index sank to 47.5 in December from 48.9 in November, although it was marginally higher than an initial flash estimate of 47.4. The figure marks the eighth consecutive month with a reading below 50, which indicates a majority of businesses reporting deteriorating activity.
The UK has a large current account deficit as well. It was around 4.6% of the GDP in 2019. This has been majorly due to negative investor sentiments because of all the political instability. Also, the UK economy has been hit badly by the economic slowdown in the major trading partners, namely, China and the EU.
Another worrying aspect is the monopoly power in public utility services like electricity and gas. A lack of competition keeps prices high and affects the real incomes of millions of consumers. Moreover, economic, social and demographic pressures continue to mount on public services such as the NHS. Some economists argue that the NHS needs a major injection of extra funding over the next 5-10 years; others believe that there are enough savings still to be achieved by addressing inefficiencies in public health care.
With economic forecasts suggesting that the UK’s GDP growth won’t exceed 1.5%, the government will have to watch its discretionary spending even if a recession is avoided, because of spending on national services like the NHS. Moreover, there is also an additional threat to the economy posed by coronavirus. Much remains to be seen how the policymakers will tackle this burden and if the economy will be able to overcome this. The current situation doesn’t leave room for high hopes.
Due to plunging stock markets worldwide, the Bank of England cut its key rate by half a percentage point to 0.25%. The Bank of England introduced a new program for cheap credit and reduced a special capital buffer to give banks more room to lend as well. Rishi Sunak, the Chancellor of the Exchequer, also scrapped business rates for small firms to help them deal with the disruption caused by the outbreak of coronavirus. Business rates are taxes to help pay for UK local services, charged on most commercial properties. Britain’s retail sector has complained for the longest time that the current business rates system was unfair and needed reform. While the retail sector accounts for 5% of the UK economy, it is burdened with 10% of all business taxes, and 25% of business rates.
Chancellor Sunak also scrapped a planned cut in corporation tax, and he is expected to raise around £6 billion from scrapping a planned drop, money he indicated could be spent on hospitals and doctors across the country. He also announced that the government would establish a coronavirus job retention scheme for all employers, large or small, that will cover 80% of wages, up to £2,500 a month. This scheme was introduced for an initial period of three months but can also be extended.
Just a month after stepping into the new job, Rishi Sunak has a lot to prove. There are a lot of expectations for the new Chancellor. Additionally, when the UK is facing an increasing threat from the coronavirus, his job becomes all the more important. It remains to be seen whether Rishi Sunak will break free of any puppet strings or be swept aside by a Treasury insider. Brexit coupled with the coronavirus outbreak has left the country on borrowed time to revamp the economy. What happens in the next few weeks could possibly define the future of the country in the coming years. What we need to wait and watch is whether the government and its policies fall into place in order to break free the shackles of a never-ending system of going back and forth.
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