How to fix the British economy

How to fix the British economy 2nd March, 2023

I recently argued that the UK’s economic performance has been disastrous for 15 years. The consequences are plain to see: people are struggling to make ends meet; taxes are high, yet public services are overloaded; fights over a shrinking economic pie are leading to widespread strikes. All this is taking place at a time of low unemployment, so we cannot simply wait for the business cycle to rescue us.

If we could somehow improve the UK’s productivity growth rate, all of these problems would become easier to solve, and we could return to the business-as-usual of each generation being able to earn more than their parents, while working less and enjoying better conditions. But how?

Start with a diagnosis of what ails the UK economy. The view from the right is that the UK is suffering from excessive taxes and red tape. This seems implausible. Taxes are certainly high by historical standards, but they have only recently spiked, yet productivity and growth have been disappointing since 2007. And there are plenty of richer economies with higher taxes.

Nor is red tape to blame. According to the OECD, UK product market regulations are among the most competitive.

The critique from the left focuses on inequality, but this is an old and mostly separate problem. Like any mixed-market economy, the UK is an unequal society, but income inequality in the UK is slightly lower now than at the time of the financial crisis and has barely changed over the past 20 years. A more relevant manifestation of inequality is the one between global titan London and regional capitals such as Manchester, which remain far behind in terms of value added per worker.

Then there’s the centrist critique: blame Brexit. Now I am as prone to highlight the idiocies of Brexit as anyone, but unless Nigel Farage has discovered a time machine, a referendum decision in 2016 cannot be blamed for poor productivity performance starting around 2007. Brexit has solved nothing, and by creating barriers to trade with our most important trading partners, along with endless uncertainty, it is demonstrably making the situation worse. But the UK’s economic problems became apparent long before the referendum.

The slightly tedious truth is that taxes, regulation, inequality and Brexit can all take a little bit of blame, alongside a gaggle of other culprits. (Professor Diane Coyle of Cambridge university has memorably likened the case to an Agatha Christie mystery: everybody did it.)

To pick a few of these culprits at random, the quality of management in British companies is the worst in the G7, according to research by economists Nick Bloom, Raffaella Sadun and John Van Reenen.

The country skimps on investment; total investment was the lowest in the G7 over the four decades preceding the pandemic. As a result, energy and transport infrastructure is run down. The Transpennine railway project is a case in point: a decade of dithering, nearly £200mn wasted and a project which was supposed to have opened in 2019 still exists largely in the imagination. Why? Politicians were more interested in announcing plans than in planning.

Low investment from the private sector is now a more acute problem than in the public sector. Is this managerial incompetence? A lack of business finance from a too-concentrated retail banking sector? A logical response to the chronic political uncertainties of the past 15 years?

Then there is the education system. It works well at the top, where British universities are still magnets for talent, but schooling is patchy and many young people, especially from deprived backgrounds, are poorly served.

Kate Bingham, who chaired the UK’s Covid vaccine development programme, recently wrote in the FT that “short-term pressures are crowding out long-term solutions”. She was pleading the case for the UK’s life-science industry, but she could easily have been describing the British condition. Short-termism is now ubiquitous. For such a venerable polity, we have developed a shocking inability to think beyond the next few weeks.

The few examples of policy excellence in the past 15 years have been times where our politicians or civil servants have risen to the challenge in a moment of crisis: I would suggest the Brown-Darling plan to prevent the banking system collapsing in 2008, the Johnson administration’s vaccine task force in 2020 and Johnson’s full-throated early support for Ukraine in 2022. Even when the UK government excels, it is not thanks to patient long-term reform and investment.

It is easy to produce a list of sensible ways forward: modernise taxes to raise more revenue with fewer distortions; improve relations with the EU and streamline UK-EU trade, especially in services; liberalise planning rules to create jobs and cheaper, better homes. But all policy wonks and most politicians know this; nothing ever happens.

It is sobering to re-read the LSE’s Growth Commission report of 2017. Many of its proposals were not policy proposals, but institutional reforms to keep the politicians away from policy proposals: Bank of England independence, but for everything. Contemplate the recent accomplishments of Whitehall and Westminster, and you see where the Growth Commission was coming from.

While researching this column, I found a video of the commission’s co-chair, John Van Reenen, in which he described “what we need to do over the next 50 years”. It seemed an impossibly daunting timescale. Then I realised the video had been posted almost exactly 10 years ago. We could have started then. We didn’t; we’ve gone backwards. We could at least start now.

Written for and first published in the Financial Times on 3 February 2023.

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