[Economics] The New UK Government Will Have Economic Breathing Space

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Welcome to Money Distilled. I’m John Stepek. Every week day I look at the biggest stories in markets and economics, and explain what it all means for your money. Memo to the new government: don’t mess it up Whoever wins tomorrow’s general election here in the UK, they face an uphill battle. The economy is in a dreadful mess and there’s a big tidying up job to be done. That’s the narrative anyway. But, as I said last week, this is actually rather overdone. This is a good election to win. For a start, on the political front, many of the big constitutional issues are in a lull period. In 2014, Scottish independence was a live issue. Not so much now. In 2016, we voted to leave the European Union and spent the next three years arguing about how to do it. It’s now done and no one with any sense has the energy to resurrect the issue right now. On the economic front, meanwhile, the great post-2008 stagnation is behind us. The global pandemic disrupted everything for the best part of three years, but it resulted in a bucket of fiscal stimulus being thrown on top of a deleveraged but dormant economy. That sent inflation surging and got us out of the zero-interest-rate era with a bang.In short, this is — for however long it lasts — not a country in a semi-emergency situation. We certainly have plenty of problems (and the fact that there’s probably more chance of “surprise” seat changes at this election than ever before reflects that), but there is breathing space. That was not the case in either 2017 or 2019 (the last two general elections). So that’s a boon for the next government’s early days. Meanwhile, the economy is actually in better shape than most people might allow, which could lead to pleasant surprises in the coming months. The UK’s Debt Picture Is Less Awful Than It Looks The ever-helpful Simon French over at Panmure Gordon has put some numbers on the argument. Firstly, Britain’s debt-to-GDP situation is not ideal, no doubt about it, sitting at nearly 100%. But this is one of those areas where relativity matters. If we were the only economy with debt-to-GDP of 100%, we’d be right to focus on addressing that, and addressing it fast, because we’d probably struggle to attract external lenders who had better options elsewhere. But we’re not. In fact, of the G7 economies, only Germany has a better-looking debt picture. Canada, France, the US, Italy and Japan are all worse. Also, the drop in the inflation rate means that the burden of servicing our debt (paying the interest) has fallen sharply too in the last 18 months or so, because of the large proportion of index-linked bonds the UK has in issue. In short, it’s not ideal, but relative to other countries, we look better, and relative to recent history, the debt trajectory is less unsustainable. None of that means that the next government can ignore it, but it’s not a screaming emergency and there’s no reason to expect an imminent run on the pound, for example. Far more encouraging still is the state of UK consumer balance sheets. This is something that very few people seem to have wrapped their heads around. But since the credit catastrophe of 2008, British households have deleveraged (i.e. reduced their debt relative to their assets) significantly. As French points out, in 2008, consumer debt (mortgages, loans and credit cards) totaled £2.2 trillion, while cash balances stood at £1.5 trillion. In other words, there was a £700 billion gap. Now those balances are roughly equal, with £1.85 trillion of each. (The figures are all in today’s money, by the way.)

https://www.bloomberg.com/news/newsletters/2024-07-03/the-new-uk-government-will-have-economic-breathing-space?srnd=economics-v2