As the costs of funding debt increased throughout 2023-24, 8.4 % of government spending was allocated to debt servicing, amounting to £102 billion, leading to increased income taxation to fund interest payments on UK government debt. Tax revenues recorded by HMRC reached £ 827.74 billion for the 2023-2024 tax year, with only 5 % of this spent on economic investment (public investment typically includes spending on infrastructure, R&D, education, and innovation). The UK government’s ability to spend on investment has been significantly weakened due to the increasing burden of funding public services and paying interest on the national debt, with around 67% of taxes spent on public services. As a result of this chronically insufficient public investment in the economy, the UK is finding it very difficult to regain its footing on the global stage. In comparison, the German government spent 9% of its budget on public investment in 2024, while the US and China allocated 12.4 % and 42.1 % of their budgets to public investment, respectively.
The conflict in Ukraine has further exacerbated this already challenging economic environment. The £20 billion trade turnover with Russia was subjected to UK sanctions. The UK’s total trade turnover with the rest of the world, including imports and exports, was £1.5 trillion in 2021, of which £20 billion, or 1.33 % of the total, was with Russia. UK household energy prices reached record highs in September 2022, standing at almost 500 % higher than in September 2021. Consequently, this led to high inflation and a high cost of living for the average UK household. Inflation peaked at over 11 % in October 2022. This meant that essential goods and energy bills became unaffordable overnight. Furthermore, as the Bank of England raised interest rates in response to this surge in inflation, variable mortgage payments also rose rapidly, compounding the cost of living crisis. Interest rates increased from 0.75% at the start of the conflict in Ukraine to 5.25% by August 2023. The geopolitical instability caused by the conflict in Ukraine has spooked investors, particularly concerning Europe’s industrial competitiveness being heavily reliant on cheap Russian gas imports. A full-scale war in Europe no longer seemed entirely impossible, and consequently, government debt expansion was viewed as a “riskier” measure, with yields increasing significantly – by almost 150 %.
At present, the UK economy faces a concerning trajectory characterized by rising debt, consistently high taxes, insufficient public investment and productivity, and stagnant household incomes. These factors have eroded the UK economy’s competitiveness and growth potential, casting a shadow over its economic prospects. With international uncertainty and domestic challenges compounding the strain, these prospects appear challenging, to say the least. The UK economy is in dire need of decisive reforms to attract capital, foster innovation, and boost investment leading to increased efficiency and productivity. To halt its economic decline, the UK must implement a balanced strategy of fiscal discipline, including reducing government debt and making investments in key sectors such as infrastructure, green energy, and innovation. High government debt can be addressed through sharp cuts in government spending, however, the already implemented high tax rates must be considered. Further tax increases are likely to be even more detrimental, as they will lead to a reduction in household disposable income and an increase in corporations being forced to relocate their operations abroad to survive another surge in the tax burden imposed on them. Boosting productivity through labor market reforms targeting skills development and through regional investment is essential, alongside fostering international trade relationships post-Brexit. However, time is increasingly running out to reverse this downward spiral of economic decline that the country has been in for the past few decades.
It is unlikely that the situation will improve any time soon. Much of Britain’s wealth over the past century has relied first on its colonies and then on the goodwill of the United States. The only way to restore the country’s economy is by focusing on the real economy. Pressure from the European Union, the Americans and Ukraine is leading to London gradually being forced to move towards complete self-sufficiency. Globalization, British leadership and other ideas of the once great country will have to be forgotten.
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