The UK government has had to spend large sums of money to deal with the coronavirus and sustain the economy. Nationwide lockdowns and shutdowns of businesses have led to a drop in tax revenues and pushed the government to borrow. Meanwhile, the implementation of Brexit and its new settings have put more financial pressure on the government and added to its debt.
The Covid-19 pandemic has had an extremely large impact on the UK economy. In 2020, its GDP was 10% down from 2019, the largest annual reduction for nearly three centuries. Lockdowns, lower demands for services and goods, disruptions in the production sector, and troubles for the supply chains, have caused sharp falls in income for many businesses in the UK. The decline has largely affected small businesses and placed pressure on cash flow in the country.
The government has taken some steps to tackle the financial problems while facing the Covid-19 crisis. Boris Johnson’s government has implemented several measures to compensate for the negative impact of the economic pressures. There were direct cash allowances offered by local authorities and also loans to ease pressure on small businesses. The government has had to borrow huge sums of money to provide for its plans while the country is struggling with the impact of the pandemic.
UK Borrowing Highest Since the 60s
In turn, Brexit has also been shaking the UK economy and causing its own financial disruptions. The separation from the European Union has reduced trade and foreign investment in the country. The UK government under Boris Johnson has borrowed money to compensate for the deficit resulting from both Covid-19 and Brexit. It has had to borrow because of the deficit, meaning its income has been lower than its expenditure.
The government has had to cover the gap between spending and revenue by borrowing and selling assets and properties. Based on May 2021 data, its debt reached 99.2% of GDP. It was the highest UK government debt since the 1960s, when the country paid off World War II debts.
The government’s borrowing in just six months in 2020 was six times higher than before Covid-19 hit the country. Boris Johnson’s government should repay the debt at specific times, but it is usually inevitable to borrow more money to pay off previous debts.
Government Income Fell During the Pandemic
Regularly, the UK government can borrow money at very low interest rates with no trouble and can afford to repay the debt. But interest rates have risen and the higher they go, the heavier the burden on the government. Whether interest rates are high or low, government debt is critical to future generations until the whole thing has been repaid. Because of the debt burden, there will be less money available for public services or tax cuts for the next generations.
One of the main reasons the government borrowed record-breaking sums was to fight and curb the impact of Covid-19 as taxes revenues dropped due to lower incomes. Lower wages and spending in the country, in addition to new rules and regulations for trade, are the main reasons for these financial pressures. This trend will continue and the government will also continue to borrow to meet the Conservative Party’s pledges, as the Conservative prime minister has made dozens of spending pledges which need funding.
MPs Criticise PM’s Covid Recovery Plan
Members of Parliament have criticised the government’s plan for economic recovery and said it lacks ministerial accountability and a clear direction. MPs have suggested that the government should make a pledge to cooperate with the devolved administrations of Edinburgh, Cardiff, and Belfast as well as regional and local leaders, for an industrial policy. Also, the Business, Energy and Industrial Strategy Committee of the House of Commons has expressed concern about Boris Johnson’s proposal for growth, replacing an industrial strategy set out by former Prime Minister Theresa May in 2017.
One solution for funding the UK government to recover from the coronavirus can be the rise of productivity in the country. During the post-pandemic period, the prime minister has to find some extra money for new costs and paying off its debt. But with a higher productivity and growth rate, the UK government will be able to repay its debt before the bills are due.
Combination of Brexit, Covid Has Created Labour Shortages
Five years on from the UK’s decision to leave the EU, the economic dislocations produced by Brexit and Covid-19 have overlapped. On the other hand, the new immigration laws stemming from Brexit, hand in hand with the pandemic, have meant a shortage of workers in Britain, driving up wages and culminating in further economic complications. Experts have warned that a lack of foreign workers will restrain the UK’s economic recovery from Covid-19 and could result in higher wages for the present workers and higher costs for services and goods. Last week, the Confederation of British Industry (CBI) asked the UK government to solve the problem of labour shortages and warned that failing to do so would put the country’s economic recovery at risk. A post-Brexit shortage of key workers will thwart the economic recovery from the coronavirus recession.
Five years since the marginal Yes vote to leave the EU, followed by two general elections, several parliamentary debates and disputes, the implementation of Brexit on 31 January 2020, and an eleven-month-long transition period after which the UK formally left the EU, Brexit has not meant economic prosperity for the Brits. During the early stages of the transition period, Britain was taken up with the pandemic like many other countries.
The pandemic has had a severe impact on all the financial and economic sectors from which the UK government has borrowed to fight Covid-19. Also, new Brexit rules and regulations leading to low investments, more trade restrictions, tariffs, etc, have pushed Britain towards an economic crisis. Presently, its debt is so huge that it makes it difficult to repay the money on due dates, unless the government borrows more and eventually makes a robust decision to invest in industry and productivity to raise income.