Five reasons the UK economy struggled in 2023

After a turbulent year for the economy, Britons may have had enough of 2023 as growth figures were revised lower and the challenges and problems came thick and fast.

Shoppers at London’s Oxford Circus during the Boxing Day sales. Picture: AFP

After a turbulent year for the economy, you may have had enough of 2023, though it ended on a brighter note, with UK inflation falling below 4 per cent and chancellor of the exchequer Jeremy Hunt somewhat controversially finding room to reduce taxes in his November 22 autumn statement. His tax cut for individuals, a 2p reduction in national insurance, will take effect shortly.

This late flurry could not disguise the reality that this was anything but a vintage year, as many people and businesses will attest. Growth figures were revised lower, snuffing out even a tiny expansion from the northern spring, and the challenges and problems came thick and fast.

These are the five things that made life hard.

An enduring cost of living crisis: Until its fall at the end of the year, the main story with UK inflation was how slow it was to subside, and how it remained significantly higher than in other leading economies. The inflation rate remained above 10 per cent for several months at the start of the year and did not drop below 5 per cent until October. Most notable about this cost-of-living crisis were the price rises for essentials. Food-price inflation topped 19 per cent in March, its highest level for 45 years, and even at the end of the year it was above 9 per cent. Household energy bills edged lower, but in November they were still more than 22 per cent up on two years earlier.

High and volatile interest rates: At the start of the year, the bank rate was 3.5 per cent, by the end it was 5.25 per cent – its highest level for more than 15 years. Every time the Bank of England appeared ready to call a halt, a disappointing set of inflation figures intervened. By September, when the bank narrowly voted to pause its rate rises, the die was cast – and it continued to insist, until the end of the year, that people should get used to this new level for the cost of borrowing, with rates set to remain “higher for longer”.

We will find out in 2024 whether the BoE went too far and over-tightened.

Official interest rates were only part of the story. At the start of the year, mortgage rates were still responding to the crisis caused by Liz Truss’s brief premiership and the mini-budget unveiled by her even shorter-lived chancellor, Kwasi Kwarteng, in September 2022.

Things then settled down under Rishi Sunak and Jeremy Hunt, only for mortgage rates to rise again in the northern spring and summer as it became clear that the bank would have to raise interest rates more to bring down inflation. More than half of households with fixed-rate mortgages have had to re-fix their borrowing, at higher rates. These increased mortgage costs have led to a sharp fall in property market activity, with house builders reducing their new-build plans further away from the government’s target of 300,000 new homes a year. The National House Building Council said new home registrations in the third quarter, at 20,680, were less than half their level a year earlier.

A stagnant economy: The latest figures from the Office for National Statistics confirmed what many already knew – that there has been very little growth in the economy. One of Sunak’s pledges, as well as halving inflation (the preserve of the BoE), was to grow the economy. But the ONS told us that the economy shrank by 0.1 per cent in the latest quarter and did not grow in the previous three months.

Ministers have been boasting that the economy confounded gloomy predictions at the start of the year by avoiding recession, but the latest figures show it was a close-run thing. If the economy were to shrink in the current quarter it would meet a widely used definition of a “technical” recession – though a fairer way of describing it would be as a flatlining economy, which the UK has been since the start of 2022.

Households, squeezed by higher mortgage rates and the cost of living, contributed to the weakness, reducing their spending in the latest quarter – though later evidence suggests Black Friday discounts led to a rise in spending in November. Retailers will be hoping that this did not detract too much from their December figures.

Businesses also reduced their investment, despite tax incentives from the chancellor.

Taxes rose but public finances are shaky: Although Hunt announced tax cuts in his autumn statement, and is eyeing up more for his March 6 budget, the big picture is one of payments to HM Revenue & Customs going up. Income tax allowances and thresholds are frozen, which at a time of inflation means a “stealth” tax increase eventually worth as much as £50bn ($93bn) to the Treasury.

The Institute for Fiscal Studies estimates that 14 per cent of people will soon be paying higher rates of income tax, compared with 3.5 per cent in the early 1990s. Businesses are also paying more, with the corporation tax rate having risen from 19 per cent to 25 per cent.

This extra tax has not yet fixed the public finances. In the first eight months of the current fiscal year, the government’s net borrowing was £116.4bn – £24bn up on the previous year and the second-highest on record. Government debt is almost £2.7 trillion, 97.5 per cent of gross domestic product.

Strikes and poor public services: There were 3.7 million working days lost as a result of industrial disputes in the 12 months to October, the largest number since the late 1980s. A problem the UK thought it had solved as a result of union reform returned. Strikes blighted the railways. In the NHS, where the junior doctors’ dispute remains unresolved, they contributed to record waiting lists – though the government’s failure to follow through with its proposed health and social care levy also showed that funding was an issue.

Strikes were concentrated in sectors where union membership remains strongest: the public sector and former nationalised industries. While nearly half of public sector workers belong to a union, the figure is only 12 per cent among private sector employees.

So, a bumpy ride. The chancellor of the exchequer has said he expects better things in 2024 and, despite high levels of government borrowing, will hope to offer more tax cuts in the spring. He will be aiming to gain an electoral advantage. The rest of us will be hoping that the economy can avoid more shocks, both self-inflicted and those arising from global events.

The Sunday Times