The economic effects of a two-year pandemic in which for long periods the economy was shut down and millions of jobs were supported by the Government’s brilliantly successful Furlough Scheme, are beginning to be felt and seen.
The suspension of international supply chains has meant the engine of global trade is taking time to restart and there are shortages of goods all around the world as it does so, just at a time when consumer demand has surged with the anticipated ending of the pandemic. That, in turn, means the remorseless rise of inflation, exacerbated by steep increases in global gas and energy prices, and higher inflation is leading to gradual interest rate rises.
But encouragingly, the UK economy seems so far to have come through its period of enforced hibernation relatively intact, although with much higher debt. In November 2021, the UK economy reached its pre-pandemic size. Dire predictions of massive job losses have not been borne out; unemployment remains low and is expected to drop further to the historic low levels of 2019, and wages are rising. The decision has been taken to increase the National Living Wage from £8.91 to £9.50 an hour in April.
In 2021, the UK had the fastest economic growth in the G7. The OECD has forecast that the UK will continue to grow at the fastest rate in the G7 this year. This is partly due to the UK’s emergence from the pandemic earlier than many other countries because of the vaccination and booster programme. The UK economy remains in the top five countries in the world for attracting Foreign Direct Investment.
The pace of recovery has meant that borrowing has been lower than expected. The Office of Budget Responsibility believes that the Government’s economic plans will mean that the current budget (excluding capital investment) will no longer be in deficit by March 2026, however, on the present faster trajectory of the recovery, its figures show there would be a surplus of 1.5% of UK Gross Domestic Product.
Therefore, the management of the economy through the pandemic has been a significant success.
It is essential now that the Government should continue to focus on the right conditions for growth and alleviating the pressures on the cost of living. The essential judgments taken by the Government about the protection of jobs and the economy, about vaccination strategy, about attaching priority to curbing social care costs, and investing in the NHS to reverse the huge backlog of treatment the pandemic has caused, have been correct.
Now the Government’s ambition is to upgrade our digital and physical infrastructure in every region of our country, equip its citizens with the skills for the future and promote innovation and greater national productivity. The soon to be published ‘Levelling Up’ White Paper will begin to show how that will be done but an essential part of it is a major increase in investment in Research and Development. In November 2020, the Spending Review set out the Government’s plan to invest £14.6-billion in R&D in 2022, building towards the target of 2.4% of GDP being spent on R&D by 2027.
Just last week, the House of Commons debated and passed the Bill to create the Advanced Research and Invention Agency, which is intended to become a new and powerful instrument in backing advanced scientific research and converting it into practical commercial exploitation. The US equivalent of this Agency laid the foundations for the internet.
It is getting these major judgments right, while continuing to show fiscal and financial responsibility amid great global uncertainties, that must be the steady aim of the Government: it should not be deflected or blown off course by any lesser preoccupations.