Finance

Investment

Advices Arch

  

Do The Prime Ministers In Britain Influence
Economic Growth?

  

Head of Country

Economy

Sustainable Dev't

     

   

It is a true "baptism of fire" for Liz Truss the new prime minister who has several crises that she has to take on from Day One. We will soon see whether any of the new policies will be able to override worldwide events and save the economy in the UK.

So, Liz Truss is the new prime minister for Britain and the leader of the Conservative Party, and the new PM of the country after she defeated "dishy Rishi" in a race that took place to replace Boris Johnson.

 

  

 
 

Political parties and prime ministers generally begin their journeys promising to make improvements to the GDP and the economy, and Truss is doing this in spades. But does that actually have an impact or do they do a better job at adding damages to the economy rather than contributing value to it?

 

 
   

Truss has a mountain ahead of her and she has the job of steering Britain through energy supply issues, the real crisis of the costs of living, and waves of unrest in the industrial sector as inflation has hit a 40-year high. Truss believes that cuts in taxes will help to propel economic growth, and any decisions that are made in the days to follow, the weeks and the months, on Universal Credit, VAT, tax, and National Insurance contributions, will all have dramatic repercussions for the economy of the country, over the short-term and the years to follow.

Truss stated that she is confident that as a country they can ride this storm out and that the economy can be rebuilt to become the brilliant modern Britain that she knows the country can be. But will the policies she has chosen improve the economy and will it stop a looming recession? Even if she manages to get things right, the new growth will not occur quickly enough and billions (hundreds) will be required to avoid a vertical economic decline.

Of course, Liz Truss won't be the first prime minister in the UK to begin her role with a drastic domestic economic crisis. One of the first tasks that Margaret Thatcher had to undertake in 1979 involved increasing taxes with the goal of controlling inflation. A recession and high unemployment followed.

In the previous decade, Harold Wilson's Labour government started its tasks with a dramatic current-account deficit, the start of a very long-running Sterling crisis, and a Pound in retreat.

 

  

 
 

Boris Johnson and Gordon Brown both experienced once-in-a-lifetime events which involved a financial crash as well as the Covid pandemic, in the same year that each one of these men took office.

Others have done better or had it much easier. Harold Macmillan secured a 2nd term in 1959 which followed an era of economic improvements. Macmillan even stated a few years before that the majority of the people in the UK had "never had it so good".

  

 
   

But when analyzing the GDP growth more closely, dating back to Anthony Eden in the year 1956, it has become evident that in most situations politicians have very little influence over the course of the economy in the UK while they are in office, since there are much greater forces that are out of their control such as global trends and economic cycles. There is also inevitable policy overlaps when one prime minister takes over from the next and in most cases a considerable lag when it comes to the implementation of policy changes, which is why it takes a lot of time for a PM to start becoming effective.

For example, under Maggie Thatcher, GDP growth declined and there were contractions in the economy in her last years. John Major inherited inflation close to double digits and 14% interest rates. Many PMS afterward could only claim modest improvements, which is usually attributed to "the great moderation" which is a time of stable macroeconomic activities that is unusual in the developed economies that spanned from 1993 to 2007. This was followed by a classic boom and then a "bust period" in the late '80s and the early part of the 1990s.

Charles Bean, former Bank of England Monetary Policy Committee member argued that healthy doses of "good luck" rather than judgment and skill could be thanked for this. And to add to this, low apparent risks and low-interest rates of this time incentivized the financial institutions into becoming highly geared. This laid the foundation for this financial crisis.

Boris Johnson perfectly demonstrated how prime ministers can become a victim of circumstances and cannot be solely judged on economic policies in relation to GDP. The economic growth in the UK over the last 60 years has come to an end with Covid and not Johnson being the cause of a painful contraction of 9.3% in the year 2020. The following year experienced record growth of 7.4%. Which was once again inspired by Covid, but aided by the government.

Before Johnson's volatility that was pandemic-inflicted, Edward Heath virtually performed a similar trick, yet it was in reverse, which topped the table with a growth of 6.5% in 1973 which in 1974 was followed by a 2.5% decline.

We will soon find out what type of influence Liz Truss will have over the economy. Domestic policies are only capable of doing so much. Investment managers advise to make sure she makes a mark she will need to burst the "inflationary bubble" and avoid a recession, navigate global events such as climate change, and solve the worldwide energy crisis, which is going to cost the world's economy billions and billions to deal with. Good luck to you Liz Truss.