Name: How the UK is becoming a ‘third-world’ economy
Uploaded: 2024-10-04T21:01:30.000Z
Duration: 15 min 36 s
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London, the city of dreams and one of the wealthiest urban areas in the world.

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Its economy is worth roughly 508 billion pounds, which equals 652 billion dollars.

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If it were an independent state, London would rank as the 22nd largest economy in the world, precisely above Argentina and Sweden.

However, London's prosperity and that of South East England is atypical for the country.

This small area makes up nearly half the UK's GDP while having about a third of its population.

If one were to amputate London's output, it would reduce British living standards by 14%, just enough to slip ahead of the US state of Mississippi.

The last 10 years have been particularly tough.

Real disposable income, which is income after taxes and benefits, has remained almost unchanged.

The cost of goods and services has gone up.

Compared to a decade ago, people can buy less with their income.

Meanwhile, productivity is low, one of the lowest of any major economy and housing has become nearly unaffordable, with the UK holding the record for the highest number of homeless people in the developed world.

The cause for these issues is rooted in past political decisions.

Britain has slumbered and stumbled its way through a number of setbacks.

Now, the crisis has become endemic with no quick fix in sight.

The UK was the first country to industrialize.

Now, it stands to become the first to de-industrialize.

Seen from a larger angle, Britain's economy is on a downward trajectory.

Just recently, housing prices rose by more than £2,200 in a month.

Unfortunately, this wasn't widely reported in the media.

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Not long ago, Britain was considered one of the world's most prosperous nations and a world of skilled professionals seeking to advance their careers.

The state is under incredible socioeconomic strain, more so than people realize.

Three back-to-back geopolitical shockwaves have left it with a colossal debt.

The catalyst, however, dates to 2008, when the financial crisis introduced long-lasting effects.

Like everyone else, Britain was deeply injured, but the way it handled the fallout set it apart from the rest of the developed world.

After borrowing roughly 141 billion pounds to bail out British banks, the government opted for austerity measures instead of investing in fiscal and social policies.

There were no significant tax cuts or minimum wage increases.

There was no inflation control, no housing assistance, no job creation programs.

For ordinary citizens, the consequences were devastating.

Real household income dropped and then flatlined for the next 15 years.

In economic terms, this is known as a lost decade.

For added perspective, in 2007, the average British household was 8% less prosperous than those in Norway and just 6% behind those in the United States.

In the years following, the deficit grew substantially.

Today, British households sit 20% behind Norway and 16% behind the US in terms of real income.

This drop in living standards is felt vividly among the middle class.

Real household income is a fundamental driver of economic activity.

It encourages consumer spending and improves living standards, all of which contribute to economic growth.

In Britain, however, the government prioritized corporate interests above all else.

But even here, in the corporate world, the gains were mostly short term.

The productivity rate was left on the back burner and no significant investments were made in this domain.

For context, increasing productivity is one of the most efficient ways to grow an economy.

But contrary to popular belief, improving productivity does not mean working harder.

Instead, the point is to boost economic output without increasing the amount of work.

So when an agriculture-driven economy switches to manufacturing microchips, productivity increases because the tech industry is more profitable and has greater margins.

Ergo, the workforce is getting more out of it for the same amount of labor.

That's why Japan is turning farmland into factories.

It adds to productivity and ultimately improves the economy.

In the UK, productivity output per capita debilitated after the 2008 crisis due to a This chart by the London School of Economics puts things into perspective.

Before the crisis, productivity was growing at nearly 2% annually.

After the crisis, however, it weakened substantially, changing a trend that had been in motion since the 1980s.

The British workforce now has the second lowest productivity rate among the G7 economies, whereas before the 2008 crisis, it was second only to the US.

The simultaneous effects of sluggish real household income and low productivity explain a lot about the performance of the British economy.

Britain's lost decade happened so casually, so indifferently, that none of its political parties acknowledged it, let alone addressed it.

There was no political discourse on this subject that was affecting millions of households.

But it was a crisis nonetheless, and so the discourse expressed itself in the form of Brexit.

However, the uncertainty over Brexit made a bad situation even worse.

It had a particularly sharp effect on direct foreign investment.

According to the Bank of England, Brexit reduced investment by 25%, measured from 2016 to 2021.

What's more, soon after Brexit, the onset of COVID exacerbated the economic crisis that was brewing underneath.

The government stepped in and borrowed an additional 280 billion pounds in its response to the coronavirus.

This was deemed necessary to get the nation through the pandemic.

But here's the thing, most of the COVID bailout was borrowed when interest rates were at historic lows, sitting around 0.1%.

At the time, repayments were expected to be relatively manageable, and this might have been true were it not for the final nail in the coffin, the Ukraine war.

The minute the Russians began their full-scale assault, access to Russian oil and gas was halted by sanctions and trade restrictions.

At the same time, an energy crisis started brewing, and the cost of living jumped across Europe.

British households were projected to pay three times the previous price just to heat their homes during the winter.

Much of the public was anxious, so the British government intervened again.

This time, it was one of Europe's most generous in financial support.

Between 60 billion and 100 billion pounds in additional spending went straight into Britain's debt.

The damage to households was mild, but the bailout gave the UK its biggest increase in debt as a share of its GDP.

The synthesized pandemic crisis and energy crisis pushed inflation rates to new highs.

In response, central banks ramped up the interest rate.

For ordinary citizens, this meant that mortgage payments went up overnight by hundreds of pounds.

Meanwhile, for the government, the high interest rate added additional billions to the national debt.

While before, debt repayments were believed to be relatively manageable, after the energy crisis, debt became increasingly expensive to pay off.

Servicing debt jumped from 40 billion pounds per year to about 100 billion pounds per year.

That is a staggering 60 billion pound increase in spending, which is nearly the entire British defense budget.

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How the UK is becoming a ‘third-world’ economy

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