In recent years, governments looking for good news on growth have sounded increasingly desperate, like a doctor looking for signs of an improvement in a terminally ill patient.
In the first quarter of this year Britain’s economy grew by 0.7 per cent, slightly higher than expected – a fact seized upon by this already beleaguered government. Both Rishi Sunak and Sir Keir Starmer have clung furiously to the belief that we are ‘the fastest growing economy in the G7’, a fact only true on the most selective of snapshots.
Our industrial energy costs – among the highest in the world – are killing off what’s left of UK production
Both statements mask a much bleaker reality. Britain’s economy is stuck – GDP per capita has actually fallen year on year as the economy has failed to keep pace with our expanding population.
A wider, underlying trend cannot be denied: on a per-person basis we are almost no richer than in 2008, and we are poorer than we were in 2019. Average salaries have barely moved since the great financial crisis. The wage growth we have seen lately is almost entirely driven by public sector pay deals and increases to the minimum wage – but these are distributive policy choices, not real growth. Meanwhile, American workers are nearly a third richer than their British counterparts. Shockingly, before the 2008 recession, British living standards were actually higher than US ones. How did it come to this?
It’s true there has been a global slowdown in developed economies since 2008. The Covid pandemic and worldwide lockdowns then led to collapses in output, spiralling debt and rampant inflation. But the UK is still underperforming. Looking at growth rates since 2019, Britain has lagged behind not only America but France, Italy, Canada and even the Eurozone average. The UK is forecast to do better than Europe in 2025, but within the wider OECD it’s being left behind.
All the while, our economy has become less equal and less fair. Wealth inequality has risen, driven largely by the unaffordability of housing, with house prices now more than eight times the average income (compared to three times in the 1970s) and average first-time buyers now in their mid-thirties. It takes on average an estimated ten years to save for a deposit. This combination of zero-growth and rising disparities in wealth is lethal for capitalism – the moral basis for it risks evaporating entirely.
Our economy doesn’t need an MOT – it needs major surgery. Yet all Rachel Reeves has done is try to balance the hypothetical books in five years’ time – a magic trick Chancellors must perform to keep the OBR (and the gilt markets) happy. Employers have been targeted for tax raids while unions have been paid off in the usual Labour quid-pro-quo. ‘Fixing the foundations’ has focused entirely on the public sector, ignoring the fact that the private sector is the engine of growth from which the state is ultimately financed. And all the while the elephant in the room is Britain’s aging population – with pension and health liabilities set to rise.
So what is wrong with Britain? Much has been written – much of it accurate – about the Byzantine madness of the planning system, the insane cost and length of infrastructure projects, our burdensome building regulations, our baffling approach to energy, and our stifling quangos and judicial reviews. It’s true that Labour are doing more harm than good – tinkering at the fiscal edges at best, squeezing the life out of businesses at worst. But the Tory record on growth was also lamentable.
Why are British investment levels historically among the lowest in the OECD? Because much of the investment is illegal. The UK has massive housing shortage and one of the lowest rates of empty homes in the developed world. This is not because the market will not respond to demand. It is because responding to demand is currently forbidden. Attempts to liberalise planning under the last government were killed off for ultimately short-sighted political reasons.
Tackling these man-made obstacles would go a long way to improving the British economy. But they are not a panacea.
The key is productivity – the economic process by which you can get more for the same, or the same for less. The UK has had the worst productivity growth of any advanced democracy since the crash. Often, it has resorted to trickery to give the illusion of growth. This was starting to reveal itself even before 2008.
One way this has been achieved is mass migration. Importing large numbers of lower-skilled workers into our service industries made things like eating out, getting a coffee or employing a cleaner much cheaper. Living standards were boosted by reducing the cost of labour so the pound in your pocket would buy more. This did nothing for productivity. It simply created even more pressure on housing and public services, created unfair competition for lower skilled jobs and – as even the IMF has now admitted – compressed wages for the working class.
The other trick has been increasing the UK’s dependency on imports. Why raise productivity at home when you can buy cheap goods from abroad? Who cares if these goods are made with slave labour or subsidised by Beijing, when they are cheaper?
But it has meant that the UK has experienced the most rapid deindustrialisation in the G7, with manufacturing now accounting for less than 9 per cent of GD. Our share of global goods exports is just 2 per cent, down from nearer 11 per cent around the time of the second world war. Britain has in its recent history been stronger in services. But the sectors with the highest capacity for productivity growth – through innovation, investment in technology and creating higher value – tend to be in manufacturing.
Our industrial energy costs – among the highest in the world – are killing off what’s left of UK production, with energy intensive industrial output down by a third in just three years. Our chemicals sector, which provides vital jobs and growth outside the south east, is in freefall. Just as the UK needs more than ever to reindustrialise, Keir Starmer looks set to hook Britain to the EU’s carbon pricing mechanism – a mad scheme to place net zero ahead of economic and industrial security. The UK is hurtling towards total deindustrialisation.
Britain does not make and do enough of what the world wants and needs to buy. Its trade deficit in goods is not made up for by its surplus in services. The overall deficit on our current account must be financed in other ways. So instead of selling goods and services, we plug the gap by selling private and public debt, equities in our companies, and ownership of our prime real estate. But at some point, financing our consumption by selling ownership of the UK to foreigners will run out of road. This dependency on foreign capital has already led to the fiascos we have seen with Thames Water, Sizewell C, the sale of Admiralty Arch and the conversion of prime central London real estate into investment assets.
Britain needs radical liberalisation at home. But it also needs a robust industrial strategy to compete with the likes of China. This cannot be left to the market alone. Since it joined the WTO in 2001, China’s plan has been to achieve an artificial dominance in global manufacturing and to invest the proceeds by lending to its geostrategic rivals. While Trump’s arbitrary tariffs are mad and without logic, the underlying distortions he is responding to are real, and affect the UK as much as America. Our strategy must not be his. But we do need one.
Investing in on-shoring high-value supply chains and boosting exports must be a part of this. As must securing access to vital resources – from chips to affordable energy and rare earth minerals. As Ed Conway has argued, we are now living in a material world – a world of raw competition for the components on which the global economy is built.
Through all of this Britain must make sure there is fairness through opportunity. One of the great injustices of the economic model we have pursued is the inequality it has caused. Britain has become a blend of a homeowners’ gerontocracy and a casino for global speculators. It should be an economy that rewards work, innovation, risk and productive investment, while increasing the prosperity of workers and families. Britain will always be a global trading nation – but it must be on better terms.
Many things will have to change to save Britain from decline. But decline is not inevitable.
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