UK economy faring better than expected

UK economy faring better than expected

With the UK general election still over a year away, the battle lines are already being drawn by the three major political parties. As is to be expected, the state of the economy as well as its future prospects will determine who will win the next election in the UK.

What is more interesting to economic analysts is the question as to why the British economy seems to have better long-term prospects than that of the eurozone. A recent report by the independent research organisation, the Centre for Economic and Business Research (CEBR), is predicting that Germany, for decades the much envied European economic powerhouse, will have a smaller economy than the UK by about 2030.

This comes as a surprise to many observers who are accustomed to judging the UK economy as well past its golden years. Less surprising is the fact that the CEBR report is predicting that in the next two decades the economies of India, Brazil and Russia will grow stronger and push down the major European economies lower down the rankings table. But the UK economy will be “the second most successful Western economy after the US”.

It is important to understand why the prospects of the UK economy are that much better than those of the eurozone. “A rising population, a low-tax regime and insulation form the worst of the eurozone’s problems” have been identified as the key success factors that are underpinning the better future for the UK economy.

Charles Davies, the head of macroeconomics at the CEBR, made a very significant comment about the UK economy when he said that the UK is moving towards a world where ‘the consumer is very constrained’ and that due to a ‘sustained squeeze’ on consumers, there will be further shift to an export/import economy.

While British pro-EU politicians are convinced that the UK cannot afford to leave the Union, Davies predicts that the future of the UK lies in British businesses “courting emerging markets of the Middle East, South East Asia and Africa that are showing remarkable growth”. Davies sees the eurozone “continuing to stagnate in the short and medium term” as the governance issues of the EU remain unresolved.

But the optimistic outlook of the CEBR for the UK economy is tempered by some sobering warnings. “The public sector is still going to be a drag on the UK economy in the medium term. The outlook for business investment is pretty cautious, even if unemployment will stay close to the eight per cent line for the next few years!

We need to ask ourselves whether we are doing the right things to make Malta an attractive destination for direct foreign investment

The present UK coalition government believes that its austerity programme is behind the upbeat prospects announced by economic forecasters. The administration is also convinced that the next step will be a reduction in taxation to make the UK more attractive to potential investors.

There is some empirical evidence that supports the theory that low taxation is one of the main magnets for new investment in Western economies. It is interesting, for instance, that the same report by the CEBR is predicting that it will take China much longer than predicted to overtake the US as the world’s largest economy. Part of the US success is their focus on lower taxation and liberal labour markets to encourage investment and economic growth.

By contrast most EU economies, especially France and Italy as well as Germany, continue to have high levels of taxation on businesses. This is partly the result of a commitment not to prune too much the benefits of the welfare state that has delivered social cohesion in most of Europe for the past 60 years.

Britain and now also Ireland seem to be moving in a rather different direction that is guided by a strong commitment to sanitise public finances, trim social benefits, and cut both personal and business taxation.

Another critically important success factor that will determine which EU countries will have better longer-term economic prospects is investment in human resources. Richard Reid, London chairman for KPMG, says “investment in skills has to be as high a priority as infrastructure as rivals in cities like Shanghai and Mumbai are attracting the best talented people”.

There are lessons to be learned in this analysis by independent macroeconomic experts. We need to ask ourselves whether we are doing the right things to make Malta an attractive destination for direct foreign investment. Our dependence on an open economy necessitates a sharp focus on promoting export-led growth.

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