Economics and politics for dummies

[overthinkersanonnymus]

Please can you smart people explain to me, like I’m a 9 year old, what has/is actually happening to the country?

I read threads on here daily about the cost of living crisis, the education system crisis, the NHS being in the toilet etc but I really don’t know how this has happened and what is the solution?

All I know is I’m worried for the future and feel really uncomfortable about things getting worse for the majority of us.

What does the government actually need to do (in your opinion) so that our standards of living are made better?

Thank you!

Well that's a tricky question! I'll have a try at answering...

Imagine the economy is like a shopkeeper running a small store. Before 2008, business was steady— profits were good, customers were buying regularly, and the shop had manageable debts. Then, a financial crisis caused a sudden collapse in customer spending. Many of the shop's biggest suppliers (banks) struggled or went bust, making restocking the shelves challenging. The shopkeeper had to borrow money just to keep things going.
To get customers spending again, the shopkeeper slashed prices (low interest rates) and gave away free samples (quantitative easing). This kept the shop open, but on much reduced profits, and the shopkeeper had to keep borrowing to cover operating costs.

As things started to stabilise, a new problem hit —Brexit. It was like a major supplier pulling out of a deal, making stock (trade) more expensive and harder to source. Customers became uneasy, and reduced or stopped shopping altogether. The shopkeeper had to rethink pricing, supply chains, and store layout, adding new costs and complexities.

Then came COVID-19 and the shop was forced to shut for months. The shopkeeper had to take on even more debt just to survive. The government stepped in with support (furlough, business loans), but when the shop reopened supply chains were disrupted, with higher costs, and staff shortages.

By the time things started to recover a little, the war in Ukraine hit, sending energy costs soaring, and the shop’s electricity bill suddenly tripled. Store prices had to go up (inflation), but customers, already struggling, couldn’t afford much. The shopkeeper had to pay staff higher wages to keep them, and profits were badly squeezed.

Now, the shopkeeper is stuck with huge debts from years of borrowing, higher costs, and customers who are still struggling. There’s no money left to invest in the store’s future to build up profits (growth) and repay debt. Hiking prices further might push customers away, but cutting prices means incurring more losses, and more debt.

This is the position of the UK economy now—trapped between high debt, low growth, and rising costs, and struggling to find a way forward.

Thatcherism is coming home to roost.

@RichcatPoorcat thanks so much for that explanation. It makes a lot more sense to me now. From what I can work out, there’s no real way out just now without prices increasing more. Is that right?

Understanding the current state of the UK in 2025 involves examining several key areas: the economy, cost of living, public services, and potential solutions to improve living standards.

Economic Overview
As of March 2025, the UK's economic growth has slowed significantly. The Office for Budget Responsibility (OBR) has halved the growth forecast for this year from 2% to 1% . This deceleration is attributed to factors such as reduced consumer spending and global trade uncertainties. Inflation remains a concern, with forecasts indicating a peak at 3.8% in July 2025 before gradually decreasing .Sky NewsGOV.UK

Cost of Living Crisis
The UK continues to grapple with a cost of living crisis, marked by rising prices for essentials like food and energy. This situation disproportionately affects lower-income households, who allocate a larger portion of their income to these necessities . Contributing factors include global supply chain disruptions and geopolitical tensions impacting energy prices.The Guardian

Public Services
Public services, notably the National Health Service (NHS) and the education system, are under significant strain. Budget constraints have led to resource shortages, impacting service delivery and quality. Recent spending cuts announced in the Spring Statement have raised concerns about the future sustainability of these essential services .The Sun+6Financial Times+6Reuters+6

Potential Solutions
Addressing these challenges requires a mixed approach:

Economic Stimulus: Implementing policies to boost economic growth, such as investing in infrastructure projects and supporting innovation, can create jobs and stimulate spending.

Wage Growth: Encouraging fair wage practices and supporting collective bargaining can help ensure that wages keep pace with inflation, improving purchasing power for workers.

Social Welfare Support: Enhancing support for vulnerable populations through targeted welfare programs can mitigate the impact of rising living costs.

Energy Price Regulation: Implementing measures to control energy prices and investing in renewable energy sources can reduce dependence on volatile global energy markets.

Public Service Investment: Prioritizing funding for public services like the NHS and education can improve service quality and accessibility.

In summary, the UK's current challenges stem from a combination of economic slowdown, rising living costs, and strained public services. Addressing these issues requires comprehensive policies focused on sustainable economic growth, fair wages, robust social support, and investment in public infrastructure.

You're absolutely right to come to that conclusion. The problem is that most of the "solutions" come with trade-offs. If the government increases spending on public services or social support, they need to fund it somehow—either by raising taxes, borrowing more (which increases debt), or printing more money (which risks inflation).

If they focus purely on economic growth, that can eventually help, but it doesn't immediately put food on the table for struggling families, and if it’s driven by deregulation or corporate tax cuts, it can widen inequality.

And as for inflation if prices keep rising, interest rates might need to stay high to control it, which hurts borrowing, mortgages, and business investment. But if rates are cut too soon, inflation could spiral again. It’s a tightrope act.

So in the short term, yes, there’s no easy way out without some level of financial pain. Prices may stay high, and wages might not keep up. The question is who bears the brunt of it? Right now, it's everyday people rather than those at the top. Fixing that balance is where the real political battle lies.

The 2008 financial crisis was the turning point. Before then, Britain had been doing reasonably well economically for the previous 15 years, under both Conservative and Labour governments. 2008 changed all that. The banks almost went bust and the government had to bail them out, using our money and accumulating massive debts in the process.

Since then, the economy has basically flatlined. What little growth there has been has come mainly from immigration, ie increasing the population & number of workers in the country. But the vast majority of those millions of migrants have been unskilled people doing minimum wage jobs. This means that economic output per person has actually decreased while demand for housing has increased, pushing prices up and making us all feel poorer.

The economy has also been hammed by an unprecedented sequence of crises. First, the effects of 2008. Then, there was Brexit. The Tory government’s decision to leave not just the political institutions of the EU (which was what people voted for) but also both the customs union and the single market made it much more difficult & expensive to trade with our neighbours.

Then there was the covid pandemic which forced the government to borrow huge amounts of money to pay for furloughs, bailouts, vaccines etc.

Then there was the energy crisis created by the Ukraine war, which forced the government to borrow yet more billions to subsidise people’s energy bills. The energy price spike caused a massive increase in inflation, which peaked at 11%. Energy & food prices increased by much more than this, making everyone poorer.

These factors have caused the government to accumulate a mountain of debt, which all has to be repaid costing us all billions in higher taxes every year.

As for what to do about it, the single most obvious thing we could do which would improve the situation significantly would be to rejoin the EU. But that is politically impossible. So we are screwed.

Unfortunately much of ‘what has happened to the U.K. is a matter of opinion. I for instance think the rot set in with such things as buy-to-let and globalisation, and everything very much was NOT fine before 2008. Buy to let massively increased demand for housing and land, leading to a complete dislocation of wages and housing prices, which meant the idea of working for a living has become a joke. High land prices are also a major problem for businesses. I am also not a big fan of massive privatisations of publicly-owned assets, and I think that there has been an ongoing privatization of U.K. public money as a result: huge amounts of money transferring straight from public taxes into private shareholder pockets.

I came across this article recently which may act as a short beginners guide. https://www.bbc.co.uk/news/articles/cx2gey6pvddo
There are a lot of beginning economics books out there.

@SpottedDonkey

The Tory government’s decision to leave not just the political institutions of the EU (which was what people voted for) but also both the customs union and the single market made it much more difficult & expensive to trade with our neighbours.

It's very telling that you actually believe this. It just goes to show that people didn't know what they were voting for.

To the best of my recollection, leaving either the CU or the single market were not on the ballot paper in 2016, nor were they significant talking points during the referendum campaign.

We voted to leave the EU lock, stock and barrel. You can't pick and choose what part of the EU you want to remain in.

There were a lot of lies told in the run up to the election and it's infuriating that people didn't understand what they were voting for.

Certain things started under Thatcher but we never recovered from 08. Low interest rates masked it though & governments & businesses didn't invest in staff, young people etc plus austerity on top. We now face continuous high pries particularly due to demographic changes

idea of working for a living has become a joke.

This is a huge problem. What & when you inherit is becoming more important than your job/earnings which is ridiculous.

huge amounts of money transferring straight from public taxes into private shareholder pockets.

another major problem

I don’t disagree that many people didn’t understand what they were voting for, but it’s incorrect to assert that a country ‘can’t pick & choose’. The reality is that there are several tiers of trading relationship with the EU which non-member states can & do negotiate. For example, Turkey has a Customs Union with the EU.

Norway has never been an EU member, but is a member of other bodies (eg EFTA) which give it many of the benefits of membership. This was a path Britain could (and I would suggest should) have pursued. In fairness, I should point out that the major trade-off of this is that Norway doesn’t have a say in making or changing the EU’s rules.

https://en.m.wikipedia.org/wiki/Norway-plus_model

@SpottedDonkey Neither of those countries are EU members. EU members have to implement and enforce all EU rules.

I agree with all the above - crisis after crisis, and we have not been particularly progressive where we could have been. I think you can't ignore is the gap between the poorest and the richest has got much wider which causes widespread annoyance and a sense of injustice. There a lot of wealth sitting in assets earning interest for people to live off without contributing productively.

The worry now is that if we slide so far into decline, it will eventually threaten social democracy. For all its faults democratic capitalism is the most stable system we have had I.e. longest period of stability in history. I'm not sure how it would happen - but features would be more riots and anti globalisation.

I think there needs to be a large scale transfer of wealth in society. There's no real reason why we couldn't do it, but it would take everyone working together. I know everyone says the billionaires will leave if we tax them and then what. Well maybe they should leave then we can rebuild from the ground up.

My uneducated idea is that no person should be allowed to pass down an inheritance that is higher than the average cost of a house.

There are many things the Government could do, but they won't - either for ideological or political reasons.

For instance, taking the analogy of the shopkeeper...

1.Reduce costs to lower prices, boost consumer spending and increase profits.

Energy prices are some of the highest in Europe, because the UK is dependent on imported gas to maintain the electricity supply. Also taxes on energy are very high compared to other countries because of VAT and the Climate change levy.
The UK has an abundance of natural resources to be self-sufficient with cheap energy for many years to come in gas, oil and coal. But new oil fields are restricted, and coal mines have been closed. The UK is undertaking this process much quicker than other countries - an ideological approach the government is strident on.

Reducing Brexit-related barriers such as customs checks, regulatory differences making cheaper and easier trade with the EU for businesses - as would rejoining the single market - but politically very difficult. A more flexible visa system would help businesses struggling with worker shortages - again politically difficult.

2.Boost productivity.

This means increasing efficiency so each worker or piece of equipment produces more or better goods and services for the same or less cost and time.
So in the case of the shop keeper it might mean automating some tasks so one worker can serve more customers (self-service tills for example) or reorder stock more quickly using computer systems.

The government could introduce tax incentives to encourage businesses to invest in new technology and infrastructure, and training skills for workers.
For now the government has increased labour costs significantly for the shopkeeper due to the imminent rise in NMW and employer NI contributions. There is also the new workers rights bill which will increase business costs further.

Improve public services - the NHS to reduce worker sick days; childcare facilities to improve worker shortages, upgrade transport systems and infrastructure such as high speed broadband.
The government doesn't have enough money to do it without raising income tax, which is politically difficult as they promised not to do so in their manifesto - but they might have no choice eventually.
Also the effects of these measures can take many years to work through and show results in growth of the economy, so they don't necessary get the credit by the time the next election rolls around - so there's no boost in votes, and all the blame for the upheaval and higher taxes.

its like society want capitalism but when society has it they then realise they need communism because pure capitalism means a very large divide of the rich and poor.

"For instance, taking the analogy of the shopkeeper"

How about the analogy of the high stakes gambler?

Gamblers take risks with their money. They expect a reward for taking this risk. However, if a gambler makes bad bets do we think they should accept the losses they incur or should they be bailed out because the proceeds of their wins trickle down to local bars takeaways taco drivers etc?

In 2008, gamblers ( by which I mean financial institutions and investors) took very unwise high risk positions and when it went south the government decided they needed bailing out ( rather then simply covering deposits ) then decided that the cost of these bail out should be recouped by austerity and thus cut benefits, pensions, pay and increased taxes whilst reducing funding for courts justice system councils education NHS etc under the guise of " "efficiency savings".

Despite 14 years of efficiency drives this we all know that infrastructure and services in this country are neither effective or efficient. Real wages have stagnated over this period and productivity stalled. Resentment over this was likely a contributory factor to Brexit and it's ironic that many people on benefits will have voted for Brexit which has stifled economic growth further and has led to more benefit freezes (real terms cuts) as well as actual cuts

So does it not make sense to bring income in to the pot by taxing the Uber rich a bit more? I don’t know If this is still the case but companies like Amazon weren’t paying tax in the UK at one point. And things like tax havens, should they not be banned, if you want to live and earn in the UK?

Again, I don’t have a clue about any of this stuff but if those of us at the bottom are already on the bones of our arses, how could taxing us more seam fair, when there is so much wealth just sat about doing nothing?

Im definitely not someone who thinks inheritance should be capped or people who have earned masses should give all that up, but people who have earned masses will have been able do that off that back of those of us at the bottom. I think it’s only fair that they are taxed sufficiently.

That might be a too simplistic way of thinking about fixing things, but it seems the best place to start.

@Walkden 'In 2008, gamblers (by which I mean financial institutions and investors) took very unwise high risk positions and when it went south the government decided they needed bailing out (rather then simply covering deposits) then decided that the cost of these bail out should be recouped by austerity...'

It's interesting to note that Iceland did the opposite and let its bank fail, prosecuting and jailing several Icelandic bankers. It sought emergency aid from the IMF to stabilise its economy and imposed capital controls to prevent money from leaving the country.

The currency collapsed, losing about 50% of its value; inflation surged, and living costs increased dramatically. Iceland was locked out of international credit markets and had to rebuild investor confidence. The UK and Netherlands sued the Icelandic government for the loss of deposits.

Iceland fell into deep recession, inflation and unemployment, with many losing their savings. Severe hardship led to mass protests and the government resigned, with its leader eventually facing trial for the financial crisis.

On the upside, Iceland experienced a much quicker economic recovery compared to other countries. Its currency devaluation made for competitive exports and boosted tourism. By 2011, Iceland’s GDP was growing, and unemployment was relatively low. Household and corporate debts were restructured, helping people recover financially.

Could the UK have done the same? The consequences would have been much more severe, given the size and global importance of the UK financial sector.

There would have been widespread business failures due to dependence on bank loans and credit to operate; panic and a run on the banks by individual savers perhaps leading to deposits being frozen to stop the collapse. London as a global financial hub (one of the largest in the world) would have been damaged perhaps irreparably. It made up 10% of GDP in 2008. The pound would have collapsed and foreign investors would have fled, making it harder to borrow money. A deeper and longer recession than Iceland was likely, due to UK dependence on the financial sector.

Ah, the idea of taxing the ultra-rich more it sounds simple, fair, even obvious. But policy is rarely that clean-cut, and what seems like the easiest solution often turns out to be the least effective.

Let’s start with the basics: the wealthiest individuals and corporations have resources the average taxpayer doesn’t.

Not just money, but access teams of accountants, lawyers, and advisors whose job is to ensure they pay as little tax as possible, legally or otherwise.

Raise their taxes too high, and they won’t just grin and bear it—they’ll move their money, restructure their businesses, or shift operations overseas. The result? The revenue you hoped to collect evaporates before it ever reaches the Treasury.

And those tax havens? They exist because no single country can shut them down. Sure, you could ban people from using them, but enforcement is another story. If someone with enough wealth wants to keep their money out of reach, they’ll find a way. Global cooperation would be needed to close those loopholes, and let’s just say there’s a reason it hasn’t happened yet.

Then there’s the idea that wealth is just sitting there, waiting to be taxed. That’s not quite how it works. The rich don’t keep their money stuffed under a mattress it’s invested in stocks, businesses, and industries. Tax it too aggressively, and you don’t just take from billionaires you risk slowing down investment, affecting job creation, and shrinking the economy in ways that hit everyone.

And here’s the real kicker: even if you could collect every pound you’re after, it wouldn’t be enough. The UK’s financial needs are vast public services, infrastructure, debt repayment. Taxing only the ultra-rich might help, but it won’t fix the whole system. To maintain a sustainable economy, taxation has to be broad-based, meaning even middle-income earners carry part of the load.

Now, does that mean we let the wealthy off the hook? Absolutely not. But rather than just hiking rates and hoping for the best, the smarter move is tax reform: closing loopholes, ensuring businesses pay fairly, and strengthening enforcement. Done right, the system can be made fairer without driving away investment or collapsing under its own weight.

Because at the end of the day, taxation isn’t about punishing wealth it’s about making sure the economy works for everyone. And that takes more than just a quick fix. It takes strategy.

As does Norway as a condition of Being in the customs union.

Then came COVID-19 and the shop was forced to shut for months. The shopkeeper had to take on even more debt just to survive. The government stepped in with support (furlough, business loans), but when the shop reopened supply chains were disrupted, with higher costs, and staff shortages.

I'd like to add:

The government stepped in with support (furlough, business loans) and realised they didn't have the money to do that so decided to print a lot of money, taking the total of printed made up money to £895 billion. The problem with just making up money is that it devalues the money already in circulation.

Your money starts to buy you less, savings lose value, interest rates go up because the government tries to fix inflation by making borrowing more expensive so fewer people take loans, but this makes it harder for business and people to buy things like houses.

Printing money, imo, is the absolute root cause of the inflation and cost of living problem we have. You can't just 'make up money' it is insanity. And no politician will ever admit that!

"Could the UK have done the same? The consequences would have been much more severe, given the size and global importance of the UK financial sector."

In the short term perhaps. In the long term, the path taken has accelerated the UK's economic decline such that the youngest generation have few opportunities, and the country's infrastructure and services falling apart and the govt penny pinching and cutting further despite the highest tax burden in living memory....

The other thing is that the mega wealthy aren't getting their money through income tax. They don't get their money is a wage slip. It is coming through asset sales, shares etc. so more the capital gains route.

By raising income tax, it is the middle to high incomers (£80k to £200k) type people. It is not the super rich taking that burden. Fine if that is what you want to do, but I think most people are aiming to be in that upper middle class bracket and I am not sure that is the target?