Readers Question: What are the main problems of the UK current economy situation?
- Low economic growth
- Government borrowing
- External Factors
The main problem facing the UK economy at the present time is persistently high unemployment and stagnant economic growth.
The latest graph for economic growth shows the UK in a double dip recession. There are signs that the UK may recover soon, but since 2008 growth has been way below the long run trend rate of growth, leading to a significant loss in potential output.
Low economic growth adversely affects many different economic problems:
- Demand deficient unemployment. The sharp rise in unemployment since 2008 is due to the slowdown in economic growth.
- Fall in real wages. Stagnant economic growth has contributed to a fall in real wages and lower living standards.
- Increased burden of debt / GDP. With falling GDP, it becomes much more difficult for the government to reduce the burden of government debt to GDP. Despite austerity measures, the debt to GDP ratio is forecast to keep rising.
Unemployment is close to double figures (8.5%) – 2.5 million. The official figures also hide some disguised unemployment, (such as enforced part-time work / early retirement) but, unemployment is still a significant problem.
Unemployment is such a pressing economic problem because:
- Increases relative poverty in the UK. (Unemployment benefits are substantially lower than average wages).
- Unemployment is particularly stressful, causing alienation and reduced living standards.
- Social division. Fortunately, unemployment hasn’t increased to southern European levels. But, the experience of southern Europe shows how society can start to fragment under mass unemployment.
- Budgetary cost. Persistently high unemployment adds to the budget deficit. The government have to spend more on benefits, and they receive lower taxes. If unemployment falls, it will be much easier to tackle the budget deficit.
- more on unemployment
In the short term, government debt is less pressing than the government have claimed. Since 2010, they have given indication that reducing debt levels are the most pressing economic problem. Because of debt, the government have pursued austerity leading to lower growth. I feel the government unnecessarily panicked over debt. Nevertheless, long term spending commitments and long-term debt forecasts are a problem. With an ageing population and perhaps lower growth rates, it could be difficult to finance long-term spending commitments from current tax levels. Debt is a long-term problem rather than short-term.
More on UK debt
4. External Factors
Many of the UK problems are due to domestic factors: low spending, low investment, negative output gap. However, because the UK relies on trade with other countries, especially Europe, external factors are a potential problem. The continued recession and economic uncertainty in the Eurozone is having an adverse impact on UK confidence and UK exports. The concern is that if the Eurozone recession continues to deepen, it could have a large drag on the UK economy – making UK recovery difficult. On the plus side, the US economy shows more promising signs.
Lesser Economic Problems
Inflation is currently a relatively minor problem because it has fallen to be within the government’s target. However, with rising energy prices, it could resume its upward trend in the coming months. This cost-push inflation is a problem because with low nominal wage growth, many could see a fall in living standards (causing an increase in fuel poverty). Also, savers may be adversely affected because interest rates are low. more on inflation
Current account deficit
The deterioration in the UK current account is a cause for some concern because it is occurring in a recession. Usually a recession leads to lower imports and an improvement in the current account. This deterioration in the current account suggests the UK could have declining international competitiveness, though it may also be a temporary situation related to Eurozone crisis. More on current account deficit
Lack of Infrastructure Investment
The recession has seen a fall in public sector investment. This threatens long-term productivity issues, such as transport bottlenecks.
As well as infrastructure problems, there are also concerns over other supply side problems, such as inflexible labour markets and lack of vocational skills.
Poor Labour Productivity growth
Some of this poor labour productivity growth can be attributed to the recession. But, if this trend of low productivity growth continues, it will harm the capacity for long-term economic growth.