The financial crisis of 2008 uncovered an unstable model of economic growth in the UK, which was based on unsuccessful policies of government borrowing. The UK debt has increased massively, doubling to more than GBP1tn in the period 2008-2013, mainly due to the financial crisis and subsequent recession. The UK government’s main economic goals are economic growth, low inflation, low unemployment and fair distribution of income. To achieve these goals the UK government implements: (1) fiscal policy to control government spending and taxation, (2) monetary policy to control the cost of borrowing and the interest rates and (3) proper legislation to control what businesses can produce and at what cost. All policies aim to encourage consumer spending.

Government Spending

It is estimated that the UK government spending exceeds GBP400bn annually, while nearly the same amount is collected from taxes. Nearly GBP135bn are directed to welfare benefits, including pensions and unemployment benefits, while GBP265bn are directed to health, construction, education, defense, and law and order activities. In fact, businesses in particular industries benefit from the increase in government spending in particular sectors. For instance, increases in health spending benefit businesses that offer medical products.

Taxation

Taxation policy has an impact on business costs. For instance, a higher tax on business profits will increase business costs and consequently, the tax will be passed on to the final price. Therefore, consumers will have to pay a higher price for the products or services. Potential increases in taxation affect both economic growth and consumer spending. If consumer confidence in the UK government declines as a result of higher prices, consumer spending will decline as well, and economic growth will be effectively affected.

Cost of Borrowing

Since the financial crisis of 2008, the UK national debt increased sharply, mainly as a result of the 2008-2013 recession, which resulted in lower tax receipts and higher spending on unemployment benefits and has led to the falling house prices as a result of higher interest rates. These cyclical factors have exposed a structural deficit, which was then intensified by the financial bailout of the RBS, Lloyds and other financial institutions. In March 2014 the public sector debt was GBP1,268.7bl, equivalent to 75.8 percent of the GDP.

Economic Indicators

In Q1 2014, GDP growth was 0.8 percent, following growth of 0.7 percent in Q4 2013. Additionally, in Q1 2014, production output increased by 0.7 percent from Q4 2013, whereas services output increased by 0.9 percent from Q4 2013. For 2014, GDP growth is estimated at 5 percent, falling back to 4 percent in 2015.

Inflation was 1.9 percent in May 2014, increased from 1.5 percent in April 2014. During the same period, the Eurozone inflation was 0.5 percent, whereas for 2014 the Bank of England’s UK inflation target is 2 percent. For 2014, inflation is expected to be slightly below the Bank of England’s target. However, recent flooding has posed a high risk in food prices and domestic supply.

According to the Office for National Statistics the unemployment rate fell below 6.9 percent for the first time since the recession of 2009. As a result, in Q1 2014, the number of people in a job increased to a record number of 30.4 million employees, the employment lever rose to 691,000 from 239,000 in Q4 2013 and the employment rate increased by 1.2 percent on a year-on-year basis.

Bottom Line

The UK public finances should return to a sustainable path towards the achievement of balanced economic growth. This means lowering the interest rates and taxes both for taxpayers and businesses so to help the creation of more jobs, develop new economic sectors and achieve economic prosperity as a result of increased consumer confidence and consumer spending.