Can the UK overcome its latest economic crisis?

London, UK © Sven Hansche / Shutterstock

Because Brexit in 2016, the UK’s growth rate was weak. Inflation is at its highest level in 30 years. By December 2021, it had risen to 5.4%. Wages have not kept pace and, if housing or childcare costs are taken into account, the cost of living has continued to rise.

COVID-19 has not been kind to the economy. Rising energy prices are putting additional pressure on strained household budgets. To ward off inflation, the Bank of England finally raises interest rates, ending the era of cheap money. Payroll taxes are supposed to increase in April to clean up public finances.

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The Resolution Foundation predicts that “soaring energy prices will turn the UK’s cost of living crisis into a disaster” by spring. The UK’s budget deficit in 2022 will be larger than all of its G-7 peers except the US. Boris Johnson’s beleaguered government finds itself in an impasse. At a time of global inflation, it must limit both public borrowing and taxes. Unsurprisingly, there is a lot of unhappiness and sadness in the air.

We’ve seen this movie before

Since the end of the Second World War, the United Kingdom has experienced many crises of confidence. One of the authors moved to the country in 1977. At the time, the Labor Party was in power. James Callaghan was Prime Minister, having succeeded Harold Wilson a year earlier. Britain’s economy was the fifth largest in the world, but has been rocked by crises. In 1976, the government had approached the International Monetary Fund (IMF) when, in the words of Richard Roberts, “Britain went bankrupt”.

From 1964 to 1967, the United Kingdom experienced “a continuous crisis of the pound sterling”. In fact, the UK was “the biggest user of IMF resources” from the mid-1940s to the mid-1970s. The 1973 oil crisis sent energy costs skyrocketing around the world and plunged the UK into a balance of payments crisis. Ironically, it was not the Conservatives led by Margaret Thatcher but the Labor led by Callaghan who declared the end of the post-war interpretation of Keynesian economics.

In his first speech as Prime Minister and leader of the party at the Labor Party Conference in Blackpool, Callaghan said: “We used to think you could pull yourself out of a recession and increase employment by reducing taxes and increasing public spending. Frankly, that option no longer exists. After this speech, the Callaghan government began to impose austerity measures.

Workers and unions protested, demanding wage increases. From November 1978 to February 1979, strikes broke out across the UK even as the country experienced its coldest winter in 16 years. This period is known as the Winter of Discontent, a time “when the dead are not buried” according to popular myth because even the gravediggers went on strike.

In 1979 Thatcher won a historic election and soon instituted economic policies inspired by Friedrich von Hayek, the Austrian rival of the legendary John Maynard Keynes. Thatcher’s victory did not immediately bring a dramatic economic turnaround. One major industry after another continued to collapse. Coal mines closed despite a historic strike in 1984-85. Coal, which gave work to nearly 1.2 million miners in 1920, only employed a thousand a century later.

Throughout the 1970s, the UK was dubbed “the sick man of Europe”. People now forget that one of the main reasons the UK joined the European Economic Community (EEC) in 1973 was to make the economy more competitive. Between 1939 and the early 1990s, London lost a quarter of its population. Yet London and even the UK have recovered from a period of crisis to emerge as a vibrant economy. Some give credit to Thatcher, but there were bigger forces at play.

There is still life in the old dog

Last week, one of the authors met with a future politician from India’s ruling Bharatiya Janata Party (BJP). A fervent nationalist, he spoke of the importance of Hindi, improving India’s defense and boosting industrial production. When the conversation turned to his daughter, he said he was sending her to London to graduate from a top British school.

This BJP leader is not atypical. Thousands of students from all over the world flock to UK schools and universities. UK universities are world class and train their students for a wide variety of roles. Note that the University of Oxford and AstraZeneca were able to develop a vaccine against COVID-19 with impressive speed. This vaccine has since been distributed in more than 170 countries. This is hardly surprising: Britain has four of the top 20 universities in the world – only the United States has a better record.

Not only students, but also capital is flowing into the UK. As a stable democracy with a strong rule of law, the UK is a safe haven for those seeking stability. It is not just Indian billionaires, Middle Eastern sheikhs and Russian oligarchs who are investing their wealth in the country. Many middle-class professionals choose the UK as a place to live, work and trade. Entrepreneurs with a great idea don’t have to look far for financing. Despite residual racism and discrimination, British towns have grown accustomed and accustomed to their ethnic minorities.

Alumni from top universities and skilled immigrants have skills that keep the UK ahead in many industries. Despite Brexit, the City of London still rivals Wall Street as a financial centre. Aerospace, chemicals and high-end car companies are still moving to the UK. British theatre, comedy, television, news media and, above all, football continue to attract global attention.

Napoleon Bonaparte is said to have once called the UK a “nation of traders”. There is some truth to this stereotype. The British are a commercially savvy, enterprising and business-friendly group. One author knows of a dealer who exclusively sells antique fans and a friend who specializes in drinks you can drink after a busy night. The other has a friend who sells rare Scotch whiskey around the world and an acquaintance who runs a multibillion-dollar insurance company in India. Many such businesses in many niches lend the UK economy an often underestimated dynamism and resilience. Everything from gaming (a £7billion-a-year industry) to something as esoteric as the antique fan trade continues to thrive.

The UK also has the lingering advantage of the Industrial Revolution and the British Empire. Infrastructure and assets dating back more than 200 years limit the need for massive capital investments that countries like Vietnam or Poland need. In addition, the United Kingdom has acquired managerial experience over several generations. Thanks to the empire, English is the global lingua franca and earns Cambridge University money through its International English Language Testing System. Lawyers and notaries continue to do well thanks to the empire’s export of common law. More importantly, British judges have a reputation for impartiality and independence: they cannot be bribed or coerced. As a result, the UK is the first place for resolving international commercial disputes.

In 1977, the UK was the world’s fifth largest economy. In 2022, 45 years later, it is still fifth, although India is expected to overtake it soon. The disaster of the 1970s turned out to be premature. The same could hold true in the 2020s. The economy is facing a crisis, but it has the strength and the track record to bounce back. The UK remains a good place to study, work, invest and live.

The opinions expressed in this article are those of the author and do not necessarily reflect the editorial policy of Fair Observer.

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