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On October 20, 2022, newly sworn-in UK PM Liz Truss had resigned after just 45 days in office, as an ill-timed budget and a reeling financial crisis led to her losing the confidence of her own party.
Image Graphics by Team Geostrata
She said, while resigning, "We set out a vision for a low-tax, high-growth economy that would take advantage of the freedoms of Brexit."
"I recognize, though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party. I have therefore spoken to His Majesty the King to announce that I am resigning as leader of the Conservative Party." she said.
The UK pound rose by 0.6% against the dollar, to $1.128, returning to September 22 levels, before the Liz Truss government had announced a mini-budget that sent the markets into a tizzy.
Mini -Budget
On September 23, UK finance minister Kwasi Karteng had unveiled a mini-budget, with an aim to remove the "cycle of stagnation" in the UK economy by cutting household taxes, cancelling a prospective increase in corporate taxes, a cut in stamp duty to revive the ailing housing market, and setting an ambitious growth target of 2.5%, higher than the current 0%.
However, the move panicked investors, with the UK pound falling 4% and "gilded" government securities being sold at an unprecedented rate. Investors believed the ill-timed budget would weaken an already ailing UK economy at a time of high inflation. In order to bring the situation under control, the Bank of England stepped in to buy securities and reassure investors of stability in the UK market, namely the pound and government bonds.
Historical Causes
The roots of the UK economy’s already ailing conditions lie in the 2008 financial crisis. The financial crisis in the US in 2008, and the subsequent bank bailout, triggered an economic depression in Europe. The UK’s growth rate fell by around 5% and so did its labour productivity, which it still hasn't been able to achieve. It also triggered an economic depression in Europe, causing rising anti-EU and anti-immigration sentiments in the UK, leading to Brexit.
Brexit caused major losses to the UK’s local businesses, as a large part of the country’s economy, along with its major financial services sector (86% of GDP). Local businesses had been one of the key beneficiaries of the EU’s economic benefits and reduced bureaucracy, which were lost post Brexit. In addition to this, the UK is already facing poor growth prospects, with the UK economy projected to grow by only 0% this year.
Thirdly, the UK already has high levels of debt in order to finance such growth-oriented policies. In June this year, the debt to GDP level had reached 102% of GDP, and a proposed mini-budget could further push this up.
Fourth, at a time when the world is reeling from rising inflation due to the pandemic and the Ukraine war, countries across the world are tightening liquidity to curb inflation. While the purpose of the mini-budget was to increase liquidity and promote development in the UK, a move to increase liquidity at such a time could potentially fundamentally weaken the economy, lower its productivity and lead to higher inflation as the money supply increases without a sufficient increase in production.
Future Outlook
As Rishi Sunak steps into 10 Downing Street, hopes are high that the 3rd Conservative Party PM and former investment banker can chart new plans for the UK government. The Prime Minister has unveiled plans for an "innovation-fueled economy," which can benefit from improved immigration and technology. Proposed tax hikes and spending cuts are expected to calm markets and curtail liquidity, but they are likely to affect UK citizens and economic growth as he encourages the UK to "brace for tougher times."
Rishi Sunak is expected to unveil the extent of his economic plans on November 17. Given his short tenure, his economic plans were pushed back as he requested some more time to finalise his efforts.
Historically, increased global trade has been seen to bring increased development, citing examples as far back as the Silk Road. As the UK increases economic interactions with the EU and signs more FTAs, it could lead to a potential recovery in the country’s economy.
Both India and the UK stand to benefit from a stable economy in the UK, as the upcoming FTA between the two nations could boost innovation, attract high-skilled immigration, provide jobs and potentially divert liquidity into investment opportunities in India. India could see increased growth, employment, development and export prospects.
BY MOKSHYA WADHWA
TEAM GEOSTRATA
mokshya.geostrata@gmail.com