Transcription
Just when you think it can't get any worse, the threat of a global trade war has contributed to confidence in the UK economy plummeting to record lows. This economic index is running at its lowest level since records began.
But it's more than just international turmoil. Dissatisfaction with the economy has been building for many years. The Institute for Government suggests that we think everything is worse since the pandemic and virtually everything except schools is worse since 2009. The Economist paints a similar picture with voters believing everything has got worse. Top of the list is roads with their innumerable potholes and hospitals with near record waiting lists.
These dismal outcomes are related to the dire economic performance since 2009. Underpinning the economic malaise is a slowdown in economic growth and productivity. This is productivity growth since 2009 and the economy has never really recovered from the financial crisis of 2009. If the economy had continued on its precrisis trend, then wages, GDP, and productivity would all be significantly higher, giving the economy the funds necessary to invest in public services.
However, if you can bear more bad news, the Resolution Foundation suggests that the official productivity statistics are actually overstating UK growth. Using more reliable HMRC, payroll and taxes data, they suggest GDP per capita has actually fallen by 0.5% between 2019 and 2024. You'd need to go back all the way to the 1930s to find a similar period of stagnation.
Now, it's not all bad. There is some good news coming in the economy. But before we get there, recent borrowing figures have been again worse than expected. A real recurring theme in the past few years, and it's creating a ruing sense of a fiscal doom loop. Just last March 2024, borrowing was expected to be 87 billion pounds. The actual figure has turned out to be 152 billion.
Government worries about the budget deficit and meeting their own boring rules have cast a shadow over the economy. The deficit seems stubborn despite record taxes. Higher national insurance contributions have impacted job creation and welfare cuts have contributed to the fall in consumer confidence and could well increase poverty levels.
A problem is that the government passed very unpopular measures: inheritance tax for farmers, means testing winter fuel, and stricter criteria for personal independence payments. Yet, combined together, these three really unpopular policies only save around 7 billion pounds a year, which is kind of a drop in the ocean compared to UK government spending. It's a kind of saving that can easily be wiped out by a slowdown in economic growth and/or higher bond yields. In fact, we've had both.
Now the government made a big deal about taking really hard decisions early on and they've managed to lose a lot of political capital without any real change in the trajectory of the deficit. Now the OBR game predict that economic growth will pick up in the next few years. But if it proves as disappointing as the past five or six years then these budget rules will be again broken in a few years time.
Now there is a saying in economics that if you get high growth then the deficit takes care of itself. If you focus only on the deficit, it can almost become a self-defeating uh problem. Certainly, that's been a story since the uh 2010s where a lot of austerity was a factor behind the low long-term growth rates.
Now, if that's all too much doom and gloom, there is at least some better news for the economy since March. Oil and gas prices have fallen around 15%, meaning that the dismal March predictions for inflation may actually be overly pessimistic. Despite the threat of tariffs pushing up some prices, UK inflation is looking a little better than it did a couple of months ago.
Now, the UK economy is far too dependent on gas prices, but it does provide some temporal relief when they do go down. Now, as a result of lower inflationary expectations, markets are now expecting at least three to four interest rate cuts this year. Lower interest rates should help support households struggling with reorggaging, consumers with outstanding debts, and perhaps importantly could help to lower interest uh payments for the government which has soared in recent years.
Now, one of the reasons for unexpectedly high borrowing last year was the recent rise in bond yields which caused so much extra debt interest payments. I think it's about the third biggest area of government spending. Although it does still remain to be seen how much bond yields fall as base rates are cut.
However, unfortunately there is a, you could say a dark shadow to this silver lining of lower inflation and that is that lower oil and gas prices really reflect the fear of a global recession hit by unprecedented tariff turmoil. So-called liberation day and even its edited aftermath have caused average US tariffs to rise to a level last seen in the 1930s. That was the Great Depression, unemployment close to 20%.
Now, the UK is less exposed to the US tariff threat than many other countries like Mexico and Canada, but it's struggling car industry can ill afford these tariffs on exports to America. Car production has already fallen significantly since 2017. And a real problem for the UK economy is a continued decline in manufacturing and industrial output in the past four or five years. It's almost like a second era of de-industrialization.
Now causes include the highest electric prices in Europe, weak demand, declining competitiveness, they all play a role. And even if the UK wouldn't be too affected by Trump tariffs directly, a global economic slowdown would definitely hit the fragile UK economic recovery. Ever since 2016, the UK has been hampered by a slowdown in trade. Export of goods have not kept up with the rest of the G7. The new trade frictions from Brexit has hit exports of goods to Europe, even if services are largely unaffected.
Now one argument for Brexit was a free trade deal with the US but so far that remains out of reach with South Korea taking priority over the UK. Now whilst a trade war may not immediately affect households the state of local communities is much more pressing. For example cuts to the police in the mid-2010s led to a fall in the number of police officers and then this was replaced with new police officers perhaps with much less experience. But whatever the reason, there's been a big rise in shoplifting incidents.
And even if the police were able to press charges, courts have still got a massive backlog since uh COVID. And even if the cases were actually cleared, there's a shortage of prison places at the moment. Years of underfunding there.
Now, one reason for low productivity growth has been the decline in participation rates with worsening health conditions causing more people to be moved onto sickness benefits. The UK unemployment rate is actually quite low at just 4.5%. And this is much better than say the 1980s where it averaged close to 10%. But today there's a kind of different problem. There's still a lot of people not working. They're just classified in a different way. Today it's leaving the labor market completely rather than being unemployed. And this is a big drag on productivity growth and the state of the economy.
Now despite higher council taxes 43% of local councils are facing bankruptcy according to the national audit office after winning local elections Nigel Farage of reform promised doge style cuts in wasteful spending. But the problem is that local authorities have already been through 15 years of very painful austerity. The real issue for councils is that they have a legal requirement to provide special needs education and social care for children and adults. And as society ages, spending on social care has soared and that squeezed all the other areas local councils used to spend money on. Housing services for young people and roads have all seen massive cuts. And this is why it's hard to fix potholes or build affordable housing. Most of the budget is going on social care. Just one example, Hampshire County Council spend nearly 83% of their budget on social care.
Now, and al austerity in many areas of the economy has had negative effects on the long-term economic growth of the economy. Too often, spending has prioritized what we might call short-termism. And when faced with budget squeezes, it's often investment that has been cut back. Investment in roads, energy, and housing, young people's education.
Now, while student university numbers have increased in recent years, we've also seen a big drop in the number attending further education institutions with an additional decline in spending per person. And this includes a 6% fall in employer skills investment leading to relatively poor levels of vocational skills in the UK economy.
Now the government do have an ambitious target to build 1 and a.5 million homes in the next in this parliament and this is seen as necessary for trying to reduce very high housing costs a big drag on the economy. The motive is understandable given the number of affordable homes has fallen and average rent has increase faster than inflation. It's often housing costs which are the biggest drag on living standards with the UK facing some of the least affordable housing in Europe.
But whilst there is a need to increase supply of housing, especially in those areas of high demand, it will be pretty difficult to achieve. House building fell to just 153,000 last year. So, it will be hard to double that annual rate to get enough momentum to get anywhere close to the target. Builders complain about too much regulation and the lack of skilled labor, but also they are reluctant to see their big profit margins eroded by a significant increase in supply. So relying on the private sector to provide so many homes um will be difficult.
Now in this regard, government plans to ease planning regulations will help to some extent increase the supply of housing, but no guarantee that um they will be built where they are needed. Just recently, a scheme to build homes in Batisy was blocked despite the scheme having 50% affordable houses. It's rare for builders to want to build so many affordable housing because usually it's not profitable and building high density is a solution, but in this case, it was vetoed by the local council.
Now, immigration has been something of a a flash point in recent years with record levels of net migration in the past few years. Now, this is forecast to fall, although past forecasts haven't always been reliable. Now, net immigration, a tricky one. It's contributed to rising rents, exacerbating the housing crisis, but also has contributed to a net contribution to public finances, though this net contribution has been smaller since migration moved from EU migrants to non-EU migrants.
Now, it's also an interesting observation that since 2004, 4 and a half million new jobs in the UK economy have been from migrants. Domestic employment just rose by 600,000. It shows how the economy has become quite reliant on migration for employment growth and to a lesser extent GDP growth. But at least since 2009, high levels of migration have coincided with a stagnation in median wages. Though of course there's many factors behind this wage stagnation.
Now certainly the difficulty in building is a was a big problem for the UK economy in recent years. HS2 has taken 70% of the rail budget which is a real shame because many smaller scale local regional rail projects have been quite successful. The UK is some of the worst public transport in Europe. A major stumbling block for towns and cities like Leeds and Birmingham. And this is one area where greater devolution of decision- making could make a difference rather than relying on Westminster to bring it think of um big national projects which may not necessarily be the best value for money.
Now to the government's credit, they have tried to increase public sector investment by allowing a more borrowing for investment. But even with a small uplift in public sector investment, overall investment is set to still fall in a few years. And it leaves the UK with this persistent low level of investment, which is a big factor behind the relatively poor performance of a UK economy.
Some better news, and it is about time to have some better news. UK growth did pick up at the start of 2025. Higher pay last year helped increase household balance sheets with a rise in the savings ratio. An optimistic scenario is that lower interest rates could see some confidence start to return to the economy. Despite welfare cuts which hurt many low-income households, the government budget is slightly expansionary with higher spending on public sector pay and some increase in public investment. Lower inflation if it comes and lower interest rates could support this future growth.
And if you like to see your glass half full, you could argue the UK has a lot of catchup potential after years of underperformance. Though I do have to admit I've been making this argument for the past 15 years to very little effect. And even a few years of decent growth would not necessarily be enough to deliver really noticeable improvements to the state of public services. So many uh years of uh underfunding have left the many um close to the bone, so to speak.
And all this doesn't really get into the long-term impact of a rapidly aging population. The share of a population over 65 is going to increase significantly in the coming years and that's a bit of a headache for the government which will find it very difficult politically to remove the triple lock pension guarantee. Perhaps we will all be saved by the rise of artificial intelligence and robots as long as they don't take over.
However, rather than all these small benefit cuts which annoyed a lot of people, would the government have been better off doing something a bit bolder, more long-term, raising the retirement age as a way to increase employment levels and reduce pension spending? It's certainly got pros and cons, but this video looks at whether the triple lock pension guarantee is sustainable, and that'll be a big question for the future, even they want to keep putting it off.
Anyway, well, thanks for watching this long um mostly um doom and gloom video. There's a few bright spots there. Maybe things will turn out better than they appear at the moment. Who knows? Anyway, if you like these videos, do subscribe. There'll be a few more coming along. And um YouTube tend to push this kind of doom and gloom video out to everybody, but some of the other more interesting videos don't get as many views. So, do check out the channel. There's lots of different videos on different topics like um uh what what do you call it? Um net zero. Is it causing high electric prices? So check that one out and uh that'll do. All right. Cheers. Bye.