A lot of political commentators were left scratching their heads as to how growth has suddenly dropped. Many on the right went out their way to claim it was due to the severe weather last month, with other moderates pointing to Brexit. Kamal Ahmed from the BBC wrote an incredibly lazy piece on the issue titled “Why is economic growth so poor?“
There is a definitive answer, it’s just not simply based on a singular factor.
1) Bad Weather
No, bad weather was not the leading cause of the UK economy’s growth to slump. Whilst it is likely to have a small impact on GDP growth, especially with construction and retails stores having their supply chain disrupted, the snow also had some benefits. For example, energy sales and online purchasing are most likely to have increased within the short period of time. It would not have been enough to offset the issues the weather brought, but overall we can conclude the weather’s impact is very limited. We can also look to other European countries who faced the “Beast from the East”. For example, we know the IMF have upgraded smaller European country’s forecasts and global growth to 3.9%. Are we really saying the severe weather just magically skipped over them and only targeted the UK?
There is a fair argument to say Brexit may have led to our growth slump, but it is not the only factor. Brexit has brought a trend of slower growth since 2016, with multiple agencies and think tanks revising growth figures for the future. And with no clear Brexit plan presented by either the UK government or the Leave Campaign (with multiple rumours of the UK remaining in the Customs Union in order to sort the Irish border situation), there is a fair amount of genuine uncertainty. And whilst it’s easy to match consumer confidence collapsing to the Brexit vote only two years ago, we can also match it to another factor which coincides.
The main reason for this slow growth is austerity imposed on us by the Tories. The UK government has recently gone into a government surplus, for the first time in nearly sixteen years. Whilst Neoliberals and Tories raise their champagne glasses in the air they have little idea what they’ve done. Allow me to put it in a simpler way:
Because the government is spending less into the economy (no longer adding pound assets for the private sector) we the public now see ourselves in a deficit. We now have to cut into our savings, sell our assets or take out loans on credit. Due to such cuts, we’re not going to spend as much into the economy and instead save more. Yet due to the huge inequality gap in the UK the poorest in society won’t be able to save. They simply can’t afford to, half the working age population has less than £100 in the bank. It’s gotten to the point where Poundland, the king of all pound shops in the UK, is closing around 100 stores and letting staff go. Just think about that. When pound stores are closing down you know there’s a serious problem.
We know government spending is a major part of economic growth. Take a simple equation for GDP:
Y (GDP) = C (consumption) + G (government spending) + I (Investment) + (X ((exports)) – M ((imports))
So spending into the economy is an important factor for GDP, yet the UK government is focused on balancing the government budget. That’s the entirely wrong approach. Instead, it should be finding an equitable balance in the real economy. Government spending increases the income for families and individuals, which pushes them to spend their increased disposable income. In turn, this generates sales and allows for greater investment. We have the fiscal flexibility since we’re a monetarily sovereign nation. Think about it, how can we run a capitalist economy when our fiscal policies ensure sales drop? With the private sector being drained of pound assets we’ve also seen investment drop. If this wasn’t scary enough, this also forces big business in the private sector to merge in order to keep profits. We know now that ASDA and Sainsbury are in talks to do a £10 billion merger. Bit by bit we are witnessing the slow transition from oligopoly to monopoly.
The April snow may have been severe, but the real pain is still to come from the destructive storm of Tory fiscal policy.