[LONDON] British Chancellor of the Exchequer Rachel Reeves had hopes that investments in key areas such as green infrastructure and construction would lift the sluggish UK economy.
Instead, the move last July to raise salaries for millions of public-sector workers and the decision to impose £40 billion (S$67.2 billion) to pay for this higher spending has countered most of the economic growth of late.
Reeves has admitted that her government needs to “do more to grow our economy”, and she reiterated her pledge to go “further and faster” to boost growth in order to raise living standards.
Her comments came as the UK economy returned to growth in November for the first time in three months, although the slight expansion – just 0.1 per cent – was less than forecast. Inflation of 2.5 per cent in December remained above the official target of 2 per cent.
It has only been six months since the Labour party won the general election. Instead of a honeymoon period that some had expected, a recent YouGov poll found that Labour’s support has slid by 8 percentage points to just 26 per cent.
As things stand, the government is only one percentage point ahead of the right-wing Reform Party, with the Conservatives starting to regain some lost ground.
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Reeves pinned the blame on “14 years of economic stagnation” under the Conservatives for the UK’s current economic situation. She added that she was determined to “kickstart growth, which is the number one priority in our plan for change”.
She has been banking on better growth to cut government debt which has soared from £800 billion in 2009 to the current level of around £2.8 trillion. State debt is almost 100 per cent of gross domestic product.
The UK Office of Budget Responsibility (OBR) predicts that annual government debt interest will be £112 billion until 2030. This is much higher than the £40 billion annual average in the first decade of this century.
Since Reeves’ heavily criticised first budget on Oct 30 last year, the pound has tumbled by 8 per cent against the US dollar and has weakened against the euro, yen and Singapore dollar.
Over the same period, yields on ten-year gilts (bonds issued by the UK government) have soared from 4 per cent to a peak of just under 5 per cent in mid-January. This is the highest government bond yield since 2007.
The FTSE 100 index of mainly multinational companies has rallied since the start of the year because businesses have benefitted from a weaker pound. The FTSE 250 index of mainly local companies, however, has been flat for the last few months.
A recent Bank of England survey of more than 2,300 finance directors found that over half of British businesses expect their profits to tumble this year.
Just over half (54 per cent) of respondents expect thinner profit margins, while a similar proportion (55 per cent) indicated that they would carry out retrenchments in an effort to slash costs.
“Businesses are taking stock of higher employment costs, a more gradual pace of interest rate cuts and (higher) inflation,” said Jon Holt, a senior partner at KPMG UK.
The UK’s Federation of Small Businesses claimed that 92 per cent of its members were worried that they might have to shed workers at some point in 2025.
Some of the UK’s top executives, including Marks and Spencer CEO Stuart Machin and Tesco CEO Ken Murphy have expressed worries about the impact of inflation on costs and higher interest rates.
Sainsbury’s CEO Simon Roberts noted that many of the supermarket chain’s customers are tightening their belts when it comes to the size of their food bills. They are feeling the squeeze after experiencing the worst inflation shock in decades, he added.
On her part, Reeves said the government is requiring 17 regulators in the UK to submit at least five proposals each to promote growth, and these will be studied over the next few weeks.
“Every regulator, no matter what sector, has a part to play by tearing down the regulatory barriers that hold back growth. I want to see this mission woven into the very fabric of our regulators through a cultural shift from excessively focusing on risk to helping drive growth,” she said.
