The Downfall of Great Britain - Arpit Kumar

In recent history, the United Kingdom held a prominent position as an economic powerhouse. A century ago, the British Empire's economic influence extended worldwide with the sun never setting on its dominion. However, as we advance to the 21st century, the narrative evolves into a different story – one characterized by economic successes, followed by a sequence of unfortunate events that contributed to the gradual decline of the UK economy.

During the 1900s, the UK was the second largest economy in the world after the United States, having a 9.2% share in the world’s GDP which falls down to 2.21 % in 2023. Even India, which was once its colonized territory surpassed the UK economy in the final quarter of 2021. 

But what led to the downfall of “The Great” Britain? Well, there is no single event that led to the change, it was the series of economic and political events that led to present Britain which is struggling with the problem of high inflation, low GDP growth, poor investor confidence in the economy, rising national debt, etc.

The seeds of the UK’s current economic woes were sown during the 2008 Financial Crisis that has shaken the entire world economy and heavily impacted the European Union including the UK economy. UK’s GDP fell by 6-7% during the period of 2008-2009, taking a toll on the financial and service sector which was the backbone of the UK’s economy. The crisis exposed the vulnerabilities of the UK's financial sector, which had become overly reliant on complex financial instruments and excessive risk-taking. Several banks collapsed, including Northern Rock and Bradford & Bingley, while others required government bailouts. The crisis led to a freeze in credit markets, making it difficult for businesses and individuals to borrow money. This further exacerbated the economic downturn, as businesses struggled to access the capital they needed to operate.

The entire recession spread across the European Union and lasted till 2013. 

The financial crisis created a new set of problems for the UK. European Union, which was badly affected by the financial crisis, was a major trading partner of the UK both in terms of imports and exports. Around 50% of European Union trade was done with the UK. Since most of the countries were still suffering due to the crisis, people started immigrating to the UK for better opportunities for jobs leaving the EU countries. As per the data, number of immigrants from other EU countries tripled from 0.9 million in 1995 to 3.3 million in 2015. Now, the common perception started building among people of the UK that why was UK allowing the immigration? People of other countries were taking their jobs, enjoying the benefits of government policies that were supposed to be meant for the UK people. Well, their claim was valid. And this was where the wave of Brexit erupted in 2016. Economists, politicians, and bankers all had different opinions on Brexit and soon Brexit became the economic and political agenda in the entire UK. 

Many political parties run their election campaigns entirely on Brexit and the majority of people made Brexit possible. Finally, on December 31, 2020, the UK officially exited from the European Union under Prime Minister Boris Johnson after following the transition period of 11 months. UK decided to trade less with the EU and forgone the economic advantages that come with being the part of EU. With trade barriers coming up, most of the small and big businesses face heavy repercussions as the free movement of goods and services gets stopped between the UK and other EU countries. Even during the entire saga of Brexit from 2016 to 2020, the investment climate became shady in the UK leading to a fall in new investments in terms of FDI and FII causing a halt on investment in R&D, technological infrastructure, and workforce productivity. 

As per the data, it was estimated that around 4% of the GDP of the UK fell due to Brexit leading to a £ 100 bn loss of output and £40 bn loss in Treasury revenue leading to one of the prominent issues that affect the UK economy.

Source: Statista

Soon Covid-19 hit the world and due to lockdown and supply shocks, UK GDP fell by around 10% during the period. So, when Liz Truss became the PM of the UK in September 2022, UK was grappling with the problem of low growth since 2008, high inflation due to COVID-19 and Russia Ukraine war, and rising levels of debt which accumulated during COVID-19 for providing fiscal stimulus. In order to tackle the situation, the government cancelled the plan of a corporate tax rate rise, an income tax rate cut to 19%, and a cut in stamp duty leading to a rise in liquidity in a high-inflation environment. This affected the economy badly as an increase in money supply during the period of high inflation further led to high inflation and degraded investor trust. The investors started selling the British pound which hit the exchange rate as well. So, in order to tackle the situation, the Bank of England promised to buy £65 bn of government bonds to absorb the liquidity in the market, and interest rates further increased to slow down the money supply which further made the situation worse as investment opportunities were already degrading. 

The entire burden of the fallout was put on Liz Truss’s head and she resigned within 44 days making her shortest serving PM in the history of the United Kingdom. 

Rishi Sunak, who was serving as Chancellor of the Exchequer during difficult times of Covid-19 appointed as Prime Minister of the United Kingdom with the hope to bring back the economy on track. 

However, the pivotal factor influencing the country's destiny was the decision to exit the European Union. Approximately 62% of those who voted for Brexit now express regret over this choice. Whether the UK will consider rejoining the EU hinges on the decisions made by Prime Minister Rishi Sunak and the sentiments of the UK populace. 

This narrative captures how ill-fated decisions have the potential to alter the trajectory of an entire nation, transforming a once-dominant global force, where the sun never set, into a country now occupying the sixth position in terms of GDP.