After the departure of Boris Johnson, a new government will need to break free from former chancellor Rishi Sunak’s spending curbs to ease inflationary pressures on households while preventing a possible slide into recession with extra support for businesses. Here are the main financial issues ministers will have to deal with.
Inflation
The consumer price index has jumped from almost zero during the pandemic to 9.1% and is forecast to rise to 11% by October, when rising energy prices push average combined gas and electricity bills above £2,800 annually. Most economists believe that price growth will moderate next year, but their forecasts depend on the end of the war in Ukraine. . Brent crude nearly doubled in price to $128 a barrel in the year before Russia invaded Ukraine, before retreating to $102.50 on Thursday.
GDP
Britain suffered its biggest drop in national income (GDP) since the early 18th century when the economy collapsed in April 2020. It recovered quickly, but the recovery has slowed this year as the global economy began to stutter. The UK imports more than half of its food and most of its gas and oil, making it particularly vulnerable to global crises. . The next official GDP data, for May, is expected to show a third straight month of contraction. The UK economy is just 0.9% bigger than it was in November 2019.
Tax burden
Ministers are facing pressure from Tory MPs to overturn plans by the Johnson government to raise taxes on businesses and households ahead of the rest of parliament to pay for spending during the pandemic. But scope for tax cuts is limited, especially when many Conservatives are also urging the government to increase the defense budget in the face of the renewed threat from Russia. . The possibility of further economic shocks and an aging population will further increase calls for extra cash from the Treasury.
UK trade
France and Britain have tracked each other for decades on charts showing the value of trade as a percentage of GDP. The global post-pandemic recovery last year lifted all boats. However, recent figures show that Britain’s trade is stagnant, while France’s position has improved dramatically. Brexit is blamed by many economists for the UK’s less rosy outlook. . In its latest assessment, the Institute of Export & International Trade reported that total UK export earnings fell by 2% from the previous month, “highlighting the difficulties businesses are facing as a result of the pandemic, the supply chain crisis, of the Russia-Ukraine conflict and Brexit”.
UK workforce
Official estimates show the UK has around 1.2 million fewer workers in 2022 than expected in 2019. Many EU workers returned home during the pandemic, older workers took early retirement and tens of thousands of students returned to education. . David Miles, chief economic adviser at the Office for Budget Responsibility, said it was likely that some older workers and many students would return to the labor market, but it was reasonable to assume that the UK had suffered a permanent downturn, leading to ongoing labor shortages in some industries. Brexit and Covid have also combined to reduce the number of workers looking for work, pushing up wages and hampering the recovery.
R&D expenses
Spending on science has fallen, and the promise of increased funding for research and development remains just that – a promise. . Sunak planned to increase UK R&D spending to 2.4% of GDP, up from 1.74% last year. France already spends 2.2% of GDP, the US 3.1% and Germany 3.2%. The chancellor originally wanted to achieve this by 2025, but earlier this year moved the date back to 2027. This article was amended on 8 July 2022 because an earlier version incorrectly said that the UK imports most of its energy. This has meant that the UK imports most of its natural gas and oil.
