The UK economy is stagnating – and the reasons run deep


In the end, his political party’s survival instincts won out over Boris Johnson’s determination to survive. It’s good news. Yet he was always an extremely important, if disastrous, political leader. He shifted the debate on fundamental questions from solutions to symbols. This is especially true of Brexit, its lasting legacy. Johnson’s insistence on the trappings of sovereignty resulted in the toughest Brexit possible. If the threat of breaking Northern Ireland protocol survives him, as it might, the worst could ensue.

Brexit is not the biggest challenge facing British policymakers. The most important is simple to describe and difficult to solve. This is the longer-term stagnation of productivity and real incomes. If the country cannot solve this problem, it is unlikely to solve much of what matters. Even the current cost of living crisis is so bad because of the terrible long term performance.

As the Resolution Foundation notes in its latest Audit of living standards, the 15 years between 2004 and 2019—pre-Covid and pre-Brexit—were the lowest for growth in gross domestic product per capita since the years between 1919 and 1934. Low growth in GDP per capita resulted in low growth in real household disposable income: that of non-retirees increased by 12% between 2004-05 and 2019-20. This can be compared to an average increase of 40% every 15 years since 1961.

Changes in income distribution have also been significant. Between 1980 and 1995, the median real disposable income of non-retired households increased by 37%, but by 67% for the top decile and by only 3% for the bottom decile. Between 1992 and 2007, incomes increased by 41%, 47% and 37% respectively: the growth was then both rapid and widely shared, which was surely much better. But then, between 2004 and 2019, when median incomes only increased by 12%, the top decile increased by 11% and the bottom decile by 2%: it was a general stagnation. In 2018, the distribution of disposable income was the most unequal in high-income democracies, just after the United States.

Performance since the financial crisis is not just bad by UK historical standards. He is also poor in comparison to these despised European peers. According to the Resolution Foundation, between 2007 and 2018, real median household disposable income, adjusted for purchasing power, fell by 2% in the UK. Over the same period, they increased by 34% in France, 27% in Germany and 23% in the Netherlands. As a result, the median disposable income of British households was well below that of its Western European peers: 9% lower than in France, for example, and 16% lower than in Germany (despite the high costs of unification).

This relative poor performance is also observed in other areas. According to the Conference Board, UK hourly output has fallen from 84% of German levels in 2007 to 81% in 2015 and 79% in 2021. UK relative GDP per capita has also fallen from 92% of German levels . in 2007, 87% in 2015 and 82% in 2021.

Things are even worse than these numbers suggest. Rising employment compensated for stagnating productivity and supported the incomes of the poor. But it is unlikely to help as much in the future. Prosperity will depend even more on productivity.

Line graph of median equivalised disposable income, before housing costs (in thousands of euros) showing that UK incomes are lower than those of European peers

Some would argue that stagnating incomes don’t matter much, if at all. They say policymakers should focus on well-being instead. There are indeed good reasons for governments to spend on mental health, wellbeing in schools, social care and climate change, as recommended by the World Wellbeing Movement. But a necessary condition for such spending is probably a widely shared increase in prosperity. Indeed, the rise of populist politics itself appears to be a natural, albeit disastrous, outcome of high inequality and stagnating real incomes in the UK. “Let them eat Brexit” is the ploy. This meal may have looked mouth-watering. But this will prove to be quite indigestible in the longer term.

The big question in British economic policy is how to end stagnation. The answer will not be tax cuts: taxes are already lower than among our European peers. Nor will it be deregulation: the British economy is relatively deregulated, except in land use. This will depend on increasing investment and bringing together lagging companies and regions. This will depend on improvements in corporate governance and capital markets, which encourage investment and innovation. This will depend on harnessing the energy revolution, to accelerate growth and reduce emissions.

Candidates for the supreme office must provide serious responses to these major challenges. And they must make those answers credible, despite the handicap of Brexit. Will they? I doubt.

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