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  • by Smriti Mathur
  • Nov 14, 2022
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UK economy: A crisis in the making for some time, with India trade deal offering hope

 

The Rishi Sunak-led UK government has had a far from an easy ride, with the most recent official figures this week revealing a contracting economy and an impending two-year recession.

The British-Asian former finance minister, who assumed leadership at 10 Downing Street last month on a promise to correct the fiscal mistakes of her predecessor Liz Truss' disastrous mini-budget, has vowed to control the rising inflation as a top priority and forewarned of burdensome tax and spending decisions to come. 

Even as they hold out the possibility of a free trade agreement (FTA) with India as a source of much-needed economic development, economists concur on the enormous size of the problem.

Dr. Anna Valero, the Senior Policy Fellow at the London School of Economics (LSE) Centre for Economic Performance, says, "the UK's economic crisis is driven by both new and some long-standing elements."

 

According to her, "high inflation, high-interest rates, and restrictive fiscal policies come against a background of unusually low productivity growth in the UK since the financial crisis, which has been a drag on real wages."

"There are significant and enduring disparities in the UK as well. She continues a new economic plan is urgently needed to put the UK on a more substantial, fairer, and more sustainable growth path because of the combination of low growth and significant disparities.

 

When asked how an India-UK free trade agreement may affect this situation, the expert commended Sunak's commitment to a deal. 

Such an agreement, she says, "may lead to development prospects for the UK, particularly if there is opportunity to export services, the UK's primary comparative advantage, to a market that is predicted to grow considerably over time."

 

The Russia-Ukraine war is seen to be the primary cause of the energy issue that is currently driving up household costs in Britain. The leading causes of the current disaster stand out as a poor post-COVID recovery, the lingering effects of Brexit uncertainty after the UK exited the European Union (EU) in 2016, and years of underinvestment resulting from austerity measures taken in the wake of the 2008 financial meltdown.

 

Dr. George Dibb, director of the Centre for Economic Justice at the London-based Institute for Public Policy Research, asserts that the UK economy had been experiencing low growth, too little investment, and economic inequality both between and within its regions for a long time before the current crisis (IPPR). 

"This was made worse by the last decade of 'austerity,' which resulted in budget cuts that hurt average families and diminished the health and education services that are the foundation of any thriving economy.

The Truss government's recent mini-budget and its proposed unfunded tax cuts, which weakened market confidence in the UK government and the economy, were the final straw that broke the camel's back, he reflects. "Things were made worse again by the huge impact on energy prices of Russia's invasion of Ukraine, with the resulting cost of living crisis that has provoked."

 

As per him, the ongoing success of new prime ministers and governments with frequently shifting agendas has made business decision-making even more difficult. As the Sunak government prepares to present the crucial Autumn Budget Statement the following week, stability and a strategy to advance the growth agenda are urgently needed.

 

There are rumors that the government intends to eliminate the dividend tax deduction, but it would only be a modest improvement. Instead, we think the government should start taxing dividends at the same rate as income tax. This would stop the unfairness that workers pay, as well as provide additional billions to support households and companies.

The UK capital's financial hub, the City of London Corporation, asked the government to concentrate on fostering development and investment.

According to Policy Chair Chris Howard, "Levelling up must involve all of the UK, including London since the success of the capital helps every region of the nation."

In the wake of the Russia-Ukraine conflict-induced "terms of trade" shock, where the price of imports - food and energy in particular - has increased sharply relative to the value of exports, the National Institute of Economic and Social Research (NIESR), Britain's independent economic research institute, also calls for a focus on such an equitable growth agenda.

 

According to Hailey Low, a NIESR Associate Economist, "The Prime Minister has to concentrate on helping poorer people cope with these shocks while at the same time ensuring that there is a clear plan for stabilizing the public finances in the medium run."

As the continuing discussions continue into the new year, she is also optimistic about an FTA between India and the UK. India, with the fifth-largest economy in the world, is located in the Indo-Pacific area, which increases the appeal of such a free trade agreement.

"The FTA with India would boost exports, improve the UK's trading position, and diversify trade channels, enhancing supply chains' resilience and reducing their sensitivity to political upheavals. According to Low, it will make it possible for the UK to obtain less expensive raw materials for production outside of the EU, helping to revitalize the country's manufacturing sector.

 

India trade deal offers hope to UK's economy

According to Dr. Anna Valero, Senior Policy Fellow at the London School of Economics (LSE) Centre for Economic Performance, there are both recent and enduring causes of the UK's economic problem.

According to her, "high inflation, high-interest rates, and restrictive fiscal policies come against a background of unusually low productivity growth in the UK since the financial crisis, which has been a drag on real wages."

"Inequalities are also significant and ongoing in the UK. The UK has been dubbed a "Stagnation Nation," and urgently needs a new economic policy to put it on a stronger, more equitable, and more sustainable growth path, "Adds she.

When asked how an India-UK free trade agreement may affect this situation, the expert commended Sunak's commitment to a deal.

 

Such an agreement, she says, "may create development prospects for the UK, especially if there is an opportunity to export services, the UK's primary comparative advantage, to a market that is predicted to grow considerably over time."

 

The Russia-Ukraine war is seen to be the primary cause of the energy issue that is currently driving up household costs in Britain. The main causes of the current disaster stand out as a poor post-COVID recovery, the lingering effects of Brexit uncertainty after the UK exiting the European Union (EU) in 2016, and years of underinvestment resulting from austerity measures taken in the wake of the 2008 financial meltdown.

 

According to Dr. George Dibb, director of the Center for Economic Justice at the London-based Institute for Public Policy Research, the UK economy has been experiencing sluggish growth, too little investment, and economic inequality across and within its regions before the present crisis (IPPR).

 

This was made worse by the last decade of "austerity," which involved budget cuts that hurt average households and deteriorated the health and education systems that serve as the foundation of any growing economy.

The Truss government's recent mini-budget and its proposed unfunded tax cuts, which eroded market confidence in both the UK government and the economy, were the final straw that broke the camel's back, he reflects. "Things were made worse again by the huge impact on energy prices of Russia's invasion of Ukraine, with the resulting cost of living crisis that has provoked. 

He believes that the ongoing success of new prime ministers and administrations with often shifting agendas has increased the difficulty of corporate decision-making and that a new approach is urgently required.

There are rumors that the government intends to eliminate the dividend tax deduction, but it would only be a modest improvement. Instead, we think the government should start taxing dividends at the same rate as income tax. Dr. Dibb continues that not only would this result in billions more being raised to support homes and companies, but it would also stop the unfair practice of working people paying a higher tax rate on their income than stockholders.

 

 The UK capital's financial hub, the City of London Corporation, asked the government to concentrate on fostering development and investment.

According to Policy Chair Chris Howard, leveling up must cover all of the UK, including London, as the city's success benefits the entire nation.

In the wake of the terms of trade shock caused by the Russia-Ukraine conflict, where the price of imports has increased significantly relative to the value of exports, the National Institute of Economic and Social Research (NIESR), Britain's independent economic research institute, also calls for a focus on such an equitable growth agenda.

 

According to Hailey Low, a NIESR Associate Economist, the Prime Minister should concentrate on making it easier for poorer people to withstand these shocks while also ensuring a clear strategy for stabilizing the public finances in the medium run.

As the continuing discussions continue into the new year, she is also optimistic about an FTA between India and the UK. India, with the fifth-largest economy in the world, is located in the Indo-Pacific area, which increases the appeal of such a free trade agreement.

Increased exports, a stronger UK commercial position, and a diversification of trade channels will result from the FTA with India, making supply chains more resilient and less susceptible to political upheavals. According to Low, it will provide the UK with access to less expensive raw materials for production outside of the EU, helping to revitalize the country's manufacturing sector.

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