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The Main Problems of the UK Economy

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Oksana Olegovna Sadovaya, 3rd year student of the Department of

Humanitarian and social disciplines
Scientific adviser Sofia Alexandrovna Popkova, teacher of the Chair of
Foreign Languages
This article examines the UK economy and analyzes its main problems.
United Kingdom, UK, economic problems, unemployment, low economic
growth, government borrowing.
What are the main problems of the UK current economy situation?

Low economic growth
Government borrowing
External Factors
The main problem facing the UK economy at the present time is persistently
high unemployment and stagnant economic growth.
The latest graph for economic growth shows the UK in a double dip
recession. There are signs that the UK may recover soon, but since 2008 growth
has been way below the long run trend rate of growth, leading to a significant loss
in potential output. (Picture 1)

Picture 1 UK Economic Growth

Low economic growth adversely affects many different economic problems:

Demand deficient unemployment. The sharp rise in unemployment since
2008 is due to the slowdown in economic growth.
Fall in real wages. Stagnant economic growth has contributed to a fall in real
wages and lower living standards.
Increased burden of debt / GDP. With falling GDP, it becomes much more
difficult for the government to reduce the burden of government debt to GDP.
Despite austerity measures, the debt to GDP ratio is forecast to keep rising.
Unemployment is such a pressing economic problem because:
Increases relative poverty in the UK. (Unemployment benefits are
substantially lower than average wages).
Unemployment is particularly stressful, causing alienation and reduced
living standards.
Social division. Fortunately, unemployment hasnt increased to southern
European levels. But, the experience of southern Europe shows how society can
start to fragment under mass unemployment.
Budgetary cost. Persistently high unemployment adds to the budget deficit.
The government have to spend more on benefits, and they receive lower taxes. If
unemployment falls, it will be much easier to tackle the budget deficit.
In the short term, government debt is less pressing than the government have
claimed. Since 2010, they have given indication that reducing debt levels are the
most pressing economic problem. Because of debt, the government have pursued
austerity leading to lower growth. I feel the government unnecessarily panicked
over debt. Nevertheless, long term spending commitments and long-term debt
forecasts are a problem. With an ageing population and perhaps lower growth
rates, it could be difficult to finance long-term spending commitments from current
tax levels. Debt is a long-term problem rather than short-term. (Picture 2)

Picture 2 UK Debt % of GDP

Many of the UK problems are due to domestic factors: low spending, low
investment, negative output gap
However, because the UK relies on trade with other countries, especially
Europe, external factors are a potential problem. The continued recession and
economic uncertainty in the Eurozone is having an adverse impact on UK
confidence and UK exports. The concern is that if the Eurozone recession
continues to deepen, it could have a large drag on the UK economy making UK
recovery difficult. On the plus side, the US economy shows more promising signs.

Inflation is currently a relatively minor problem because it has fallen to be

within the governments target. However, with rising energy prices, it could
resume its upward trend in the coming months. This cost-push inflation is a
problem because with low nominal wage growth, many could see a fall in living
standards (causing an increase in fuel poverty). Also, savers may be adversely
affected because interest rates are low.
The deterioration in the UK current account is a cause for some concern
because it is occurring in a recession. Usually a recession leads to lower imports
and an improvement in the current account. This deterioration in the current
account suggests the UK could have declining international competitiveness,
though it may also be a temporary situation related to Eurozone crisis.
The recession has seen a fall in public sector investment. This threatens
long-term productivity issues, such as transport bottlenecks.

As well as infrastructure problems, there are also concerns over other supply
side problems, such as inflexible labour markets and lack of vocational skills.
Some of this poor labour productivity growth can be
attributed to the recession. But, if this trend of low productivity
growth continues, it will harm the capacity for long-term
economic growth.






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