British Economy Reeling Following the Death of the Queen
September has been nothing short of momentous for the United Kingdom, who lost their monarch of seventy years and appointed a new prime minister within the span of two days. Add to that the soaring inflation rates and energy prices plaguing Europe as a result of the ongoing war in Ukraine along with the historic devaluation of the pound, and Britain finds themselves in a very precarious position with brand new leadership at the helm.
So far, that new leadership has inspired little confidence from the rest of the world. The new Liz Truss government announced a spending and tax plan last week that promised steep tax cuts for wealthy individuals and measures aimed at lowering energy prices which was promptly met with widespread criticism. The International Monetary Fund warned in a statement released the next day that the new plans could exacerbate inflation and destabilize markets, actions which would put the U.K at odds with the rest of the world who is actively working to combat inflation. The IMF predicts that the tax cuts will fail to have the intended effect of boosting investment and will most likely result in increased economic inequality.
Similar tax policies were most recently seen in the United States under the Trump administration, and those measures served primarily to increase consumer spending, a trend which would be dangerous in the type of high inflation environment that the U.K. is currently operating in. This plan also puts the British government directly at odds with the efforts of the Bank of England, who were regularly raising interest rates with the intention to decrease inflation.
In response to the new tax plan, the Bank of England has shifted tactics and vowed to undertake large-scale purchases of government bonds with the goal to boost the pound and bring down interest rates in an attempt to win back global investors who have been scared off. The disconnect between the government and the central bank has not inspired much faith in the British economy at large.
Ian Goldin, a professor at Oxford, has low expectations for the future of the U.K. economy, stating “it’s just a question of time before it falls out of the top 10 economies in the world.” Britain’s presence as a global power has been in question for many since their departure from the European Union in 2016. With the death of their longest reigning monarch in history coinciding with the record low value of the pound, it seems that the United Kingdom may be ushering in a new era of decline.