The sick man of Europe
Britain is caught in a doom spiral of low wages and high welfare, argues our Deputy Director Adrian Pabst
As the summer returns to the British Isles, you could be forgiven for thinking that ‘things can only get better’. Yet the run-up to the General Election next year is no remix of 1997 when an expanding economy helped to create the conditions for national renewal – even if much of this was ultimately squandered. Now, after years of economic stagnation and political paralysis, the country faces a chronic state of crisis and the prospect of further decline into disorder and immiseration.
From 1993 until the impact of the financial crash in 2008, the United Kingdom experienced 15 years of uninterrupted economic growth. Since then both output and productivity have largely flatlined. As the National Institute of Economic and Social Research has shown in its quarterly outlook released last week, the UK economy will likely suffer five years of lost economic growth, with the pre-pandemic peak not reached until the end of 2024.
While Covid and now the cost-of-living crisis following Russia’s invasion of Ukraine are major external shocks, Britain has for some years been near the bottom of the charts of advanced economies. The economy is stuck in a vicious circle of persistently high inflation and low or no growth for the foreseeable future.
Headline consumer price inflation won’t return to the Bank of England’s target of 2% until 2025 unless interest rates are hiked to the point of tipping the economy into recession. Even if economic contraction is narrowly avoided, growth reached just 0.2% in the three months to June and won’t exceed 0.4% next year. In a world where almost every other advanced economy is expanding, the UK is falling behind.
This the result of decades of low productivity growth, low investment and low skill levels – from STEM subjects (science, technology, engineering, maths) to vocational and technical training. Not to mention the poor, overstretched public services and failing infrastructure. The UK in the 2020s resembles the country in the 1970s with high inflation and stagnant growth – or stagflation – as well as strikes and social division.
And it gets worse. The poorest ten per cent of the population have been hit hardest by the cost-of-living crisis. To have the same living standards they had before Covid struck, they would need an extra £4,000 in disposable income. Instead, they have had to run down their savings and go further into debt to afford permanently higher energy, food and housing costs. Compared with the year prior to the pandemic, the 14 million households in the bottom half of the income distribution are 17 per cent worse off whereas the richest tenth are only 5 per cent worse off.
Far from levelling up the regions devasted since deindustrialisation in the 1980s, the gap with London, the metropolitan parts of the South-East and cities like Manchester or Edinburgh is growing. Real wages in London are projected to grow by 7% in the period 2019-24, whereas over the same period they will likely fall by 5% in the West Midlands. And in London, it is people in the international traded sectors such as finance and law who are doing very well whereas the key workers who got us through the pandemic struggle to get by.
This morning’s figures about UK wages growing at the fastest rate since record began obscure the fact that inflation is cancelling out most of the growth and that workers are poorer than a decade ago as wages are on average about £1,000 than they were in 2008 when the financial crash hit.
Disparities of income and assets are widening. As power and wealth become more concentrated, Britain is an increasing patchwork of elite enclaves enclosed within a vast wasteland of neglected ex-industrial towns and former mining villages strewn across rural and coastal areas. By uncritically embracing globalisation and the knowledge economy, successive governments have failed millions of people.
Yet the British crisis goes even deeper than in the 1970s as dysfunctional markets lack productive capacity and the state lacks institutional capacity. In terms of the national economy, we don’t own much and we don’t make nearly enough – housing, high-tech manufacturing, medical supplies or indeed babies.
Instead, the UK economic model resembles a vast rentier system built on a property market powered by the City of London and fuelled by foreign capital. London is at the heart of a power nexus running from Silicon Valley via Wall Street and the Middle East all the way to nominally Communist China. For all the strengths of the City, life sciences and gigafactories, the volume of financial transactions is inversely related to the generation of value. We need fewer speculative bubbles that enrich the rentier class of domestic and foreign oligarchs. And we need more goods and services that foster economic security and flourishing, with decent, properly paid jobs that give people not just an income to pay the bills but a sense of purpose and fulfilment.
The prospects for recovery and renewal are bleak. None of the parties seem prepared to tackle the British disease of low wages and high welfare, with state subsidies such as tax credits compensating for low pay that adds to the profit margins of monopolistic markets. The state is larger but largely ineffective, with little strategic investment in productive sectors. Taxes are much higher but mostly spent on a bloated bureaucracy with Kafkaesque managerial layers – instead of channelling resources into frontline staff and services.
So far both the Conservatives and Labour are sticking to the old orthodoxy of fiscal prudence and the myth of trickle-down wealth. ‘There is no money’ is the 2020s version of ‘there is no alternative’, when in reality there is fiscal space to boost public investment in areas such as housing, skills and transport that can help unlock business investment. Tax cuts would do nothing other than create a pre-election boom followed by the inevitable bust with money flowing up rather than down every provincial gulley.
We need a reckoning with Britain’s chronic condition. And a new consensus around rebuilding state capacity and the productive basis of our national economy. Unless we embrace new ideas, things will likely get a lot worse before they get better.