Britain faces a "new age of austerity," warns a think tank, which has revealed that gross domestic product (GDP) per capita is now less than it was five years ago.
The Oxford Economics report, issued at the end of last year, estimated GDP per capita to be 22,700 pounds (about 36,700 U.S. dollars) in 2009, down from 23,000 pounds (37,200 dollars) in 2005, when adjusted for the effects of inflation.
GDP per capita is a key measure of economic prosperity and living standards. Its decline
in real terms since 2005 is significant because that year was an election year, as will be 2010.
The Labour Party won the 2005 general election, for the third time in a row under Prime
Minister Tony Blair.
Now, under Prime Minister Gordon Brown, Labour faces a general election no later than
the end of May 2010, and was trailing in the two most recent opinion polls by 9 percent and 12 percent to the opposition Conservative Party.
Commenting on these findings, Adrian Cooper, Oxford Economics' managing director,said: "The decline in UK GDP per capita over the last four years contrasts markedly with the improvements seen over the Labour government's first two terms."
"Coupled with the tax rises to be implemented over the coming years -- starting on Jan. 1,2010 -- this research underlines the new age of austerity facing the UK economy."
Tax increases include the return to 17.5 percent Value Added Tax (VAT) on Jan. 1 after
13 months at 15 percent in a government bid to stimulate the economy.
The Bank of England has predicted that this will initially force up inflation, perhaps as
high as 3 percent, before it falls back again.
An increase of 1 percent in National Insurance, which pays for the National Health
Service and is paid by everyone, is the equivalent of increasing the base rate of income tax.
This has been announced and will start in April 2011. In addition, there is a planned increase in topline tax to 50 percent for wages over 150,000 pounds (about 241,500 dollars).
The most significant problem to face the economy in the medium term is the massive size
of the national debt.
Chancellor of the Exchequer Alistair Darling predicted in his Pre-Budget Report on Dec.
9 that the public sector borrowing requirement (PSBR) for 2009 would be 178 billion pounds (about 287.7 billion dollars), and 176 billion pounds (284 billion dollars) in 2010,falling sharply after that.
Some experts criticized Darling for failing to say how he would get PSBR to an acceptable level.
Failure to either deal with the debt or to provide a detailed plan of how it will be tackled
would severely dent the country's financial creditability, and make borrowing more expensive, say experts. Tackling the debt mountain will inevitably lead to cuts in budgets,services and jobs.
The fall in British GDP per capita combined with the decline in sterling means that Britain
has seen an even sharper decline in its relative living standards compared with other major
economies.
GDP per capita rose by 12.6 percent in Labour's first term between 1997 and 2001, and
by 8.3 percent in Labour's second term between 2001 and 2005, but has fallen by 1.3 percent over the past four years.
Britain, the only G20 nation still in recession, has been in recession for six straight
quarters to the third quarter of 2009, the longest since records began in 1955.
Darling predicted an end to the recession and a modest return to growth of 0.5 percent
for the fourth quarter of 2009, followed by more modest annual growth of up to 1.5 percent for 2010.
Even allowing for this recovery, Oxford Economics expects GDP per capita to rise to
only 22,775 pounds (about 36,767 U.S. dollars) next year (measured in 2009 prices) -- a reduction in living standards equivalent to 225 pounds (362 U.S. dollars) per person compared with 2005.
According to Oxford Economics, British GDP per capita has now fallen to 35,590 U.S.dollars -- 23 percent below the United States and more than 10 percent lower than in Germany, France and Japan.
Oxford Economics emphasized that these dollar GDP per capita figures were calculated
at market exchange rates and do not account for differences in the relative cost of living in
different countries.
"Measured at purchasing power parity, UK living standards in 2009 were still higher than
in Germany, France, Italy and Japan," said the report. "But UK living standards still trail
those in the U.S., and the gap is set to widen in 2010 as the U.S. economy recovers more strongly than the UK."