17 year-old Timur Boranbayev breaks down the economic policies ahead of UK elections
October 27, 2023
Will Sunak’s fight against a strained economy win over young people?
The decision to maintain interest rates by the Bank of England indicates that the effects of the cost of living crisis are slowly being minimised.
This enables Rishi Sunak to stay on top of his “five promises” – three of which are halving inflation, growing the economy and reducing debt – as his government prepares to take decisive action to gain support.
But will he win the young voters’ hearts and minds as his party still has an “alarming” unpopularity among them?
Sunak has tried to uphold his economic promises with the hope of influencing voters, from all ages, to choose the Conservative Party for government in the upcoming general election.
Effects of interest rates on young people
The Bank of England’s governor, Andrew Bailey, voted to maintain interest rates at 5.25% in a tight five to four split by the Monetary Policy Committee (MPC).
There are nine members of the MPC, their fundamental role is to set the base interest rate. They meet monthly to assess factors that are likely to influence the rate of inflation over the upcoming 18 months.
Since November 2021, the Bank of England has adopted contractionary monetary policy due to which interest rates were raised 14 times to tackle the high inflation rate which was offset by the COVID-19 pandemic, war in Ukraine (which caused an increase in gas and oil prices as availability of these commodities diminished by isolating Russia from international trade) and the adverse effects of Brexit.
The decision to maintain interest rates at 5.25% was controversial as most expected the MPC to further raise the cost of borrowing. This stems from the fact that price levels are still rising at a high rate which comprises the Bank of England’s 2% target.
This is especially amplified since the UK consumer confidence rises to its highest level since January 2020, likely to contribute to a greater demand-pull inflation in the long-term.
Although the base rate was maintained, it is still at its highest level since the financial crisis of 2008.
High interest rates have harmful effects on young people such as slower growth in jobs and wages, and heavy reliance on labour income for consumer goods and house expenditures.
As of August, official figures show that inflation fell to 6.7%. This will increase UK’s aggregate demand, since it will foster both consumption and investment due to a decrease in general price level, which will increase consumer and business confidence.
Due to the increase in confidence, consumers are more likely to spend on goods and services and firms will seek to take out more loans to purchase capital stock – improving the quality of their products due to the addition of the upgraded machinery. This will also boost the economy’s potential economic growth as the productivity of the workforce strengthens.
This is especially promising since the UK is facing severe issues that may cause economic growth to contract: mortgage prices declining since the middle of summer, the catastrophic handling over the High Speed 2 (HS2), and progressive slump in private investment over the past few decades.
These have knock-on effects for young people which subsequently diminish confidence in the current government. This could eventually bite the chances of electoral success for the Conservatives as young voters would turn to the Labour Party to ease the prevailing economic pressures in their future.
UK house prices suffered the sharpest annual drop in 14 years as data, released by Halifax (Britain’s biggest mortgage lender), showed that prices fell by 4.6% in August – marking the biggest year-on-year decrease since 2009.
The typical price tag of a UK home has dropped by about £14,000 over the past 12 months to £279,569. The fall of assets may prevail the wealth effect – a behavioural economic theory suggesting that people spend more as the value of their assets rises.
The Cost of Living Crisis: Financial impact on young people
The drop in housing prices leads many to reduce their consumer spending as their confidence regarding the economic climate declines. As a result, economic growth plunges due to the descent of consumption, which accounts for around 65% of the country’s aggregate demand.
Swati Dhingra, a member of the MPC, expressed her concerns, when speaking to the BBC, that millions of mostly young and poor households would be affected next year if interest rates remain high as expected.
With mortgage costs and rents rising, the burden on young people is additionally intensified with the increase in food and energy costs disproportionately affecting those on low incomes. Their consumer confidence shrinks which may directly translate to their confidence in the Conservative party – thus, considerably reducing Sunak’s ability to win the upcoming election.
One way in which Sunak is able to mitigate the damage to young people is to offer significant government-schemes in apprenticeships or education. Although it does not solve the problem in the short-term as it does take time, it provides a platform for young people to gain expertise which empowers them for greater paid jobs in the future.
Moreover, it can boost confidence in the government, helping to sway younger voters to support them as such schemes can be upheld and successfully carried out for the next term.
Criticism surrounding HS2
The UK economy is facing turbulence in funds of HS2 as criticism is arising over “declining public realm.”
HS2 is a new high-speed railway that will form the backbone of Britain’s transport network. It is Europe’s largest infrastructure project on which the government has already spent over £40 billion. The project was first introduced in 2009 under Gordon Brown’s Labour government and received the green light by the Conservative-Liberal Democrats coalition government in January 2012 to begin the ambitious project.
Since then, the IPA labelled it as “unachievable” by the Government as it was tagged with a red rating – “there are major issues with project definition, schedule, budget, quality and/or benefits delivery, which at this stage do not appear to be manageable or resolvable.”
On October 4, the Prime Minister announced the scrapping of the northern leg of the HS2 to Manchester at the Conservative Party conference in Manchester. The decision to scrap the HS2’s line to Manchester triggered substantial backlash from the northern population (including several mayors) of the UK.
This is certainly going to impact their voting behaviour when the general election is snapped as its local surroundings have not been improved, thus decreasing quality of life.
This negative impact is extended to young people because of the fall in job opportunities in the local areas. The loss in gained work experience and salary results in the further reduction of economic growth and quality of life, all amplified due to high interest rates.
Attempts to boost business confidence
The last time the UK was above the G7 median level of investment (as a proportion of GDP) was in 1990. Since then, British business investment shrank to a point where it ranked 27th among the 30 Organisation for Economic Cooperation and Development (OECD) countries in 2021.
Over the decades, this fall in investment has resulted in a decrease in productivity – the UK spends more time producing less than other competing economies – accounting for a decrease in real and potential growth, real wages and government revenue Despite this, the development in technology (robotics and AI) could provide a solution to the problem.
- From April 2023 until the end of March 2026, companies can claim 100% capital allowances on qualifying plant and machinery investments.
- Full expensing allows companies to write off the cost of investment in one go.
- Under full expensing, for every pound a company invests, their taxes are cut by up to 25p.
It will ensure that the UK’s capital allowances regime is world-leading.
The Chancellor Jeremy Hunt’s main objective of the approaching Autumn Statement is to repair the lack of business investment.
Measures have been taken in the form of various tax changes such as the “super-deduction” tax break – which allows firms investing in certain types of capital stock to receive above-average tax reductions.
The chancellor also announced a new scheme dubbed the full capital expensing policy which allows firms to deduct spending on retained profits, meaning less corporation tax.
These reassuring attempts indicate the government is trying to push to solve the problematic issue by encouraging investment through boosting business confidence in the economy.
Impact on Sunak’s career
Voters will look for a wide range of aspects when assessing to choose between Rishi Sunak’s Conservative party or Keir Starmer’s Labour party in the upcoming general election (scheduled before January 2025).
These aspects include how well the incumbent government has done in office, party policies on a vast variety of topics, and the overall image of the party and its leader.
Issue voting suggests the idea that one judges a party by their position on a particular problem and votes solely based on this. A key detail, which the electorate considers, is valence issues – whether voters share a common goal, usually in desiring economic prosperity.
This sparked Sunak’s commitment to make five promises regarding the economy, health and immigration earlier this year in order to steer the Conservatives to electoral success under his leadership. He pledged to UK citizens that the government’s priority in 2023 is to “halve inflation, grow the economy, reduce debt, cut waiting lists, and stop the boats” when delivering his speech in Stratford.
It can be concluded that Sunak’s government has been so far successful in striving to halve inflation, despite analysts remaining divided over this subject, as the Bank of England remains confident in achieving its target, stating in their monthly report that they “expect inflation to fall further to around 5% this year and meet our 2% target by early 2025.”
However, the undertaking to grow the economy has been extremely difficult due to the promise of lowering general price levels. This is because reducing high inflation leads to a trade off in economic growth as higher interest rates squander investment and consumption.
In its report, the Bank is only expecting the economy to grow by a meagre figure of about half a percent in 2023 and 2024. This does highlight the significance of inflation for the government and its commitment to reduce its damaging effects in hopes of attracting more votes.
The dedication to reduce national debt totally depends on Sunak’s achievements in growing the economy as cutting debts will be harder if the UK’s economic growth faintly rises. There were encouraging signs as declared in the Budget in March, according to which the government is on track because of the Independent Office for Budget Responsibility’s (OBR) forecast that debt as a proportion of GDP would fall in 2027-2028.
All the initiatives serve as an objective to sway young voters to back the Conservative party by alleviating economic burdens to improve the quality of life, but only time will tell if Sunak’s “entirely confident” standpoint on electoral success will manifest into reality.