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Britain has a growth problem. This is not unique. The fitted trend growth of UK GDP per head between 2008 and 2023 was a miserable 0.7 per cent a year. But trend growth was still lower in France and Italy. Even in the US growth of GDP per head was only 1.5 per cent. For a host of reasons, including rising dependency ratios, adverse shocks and weak productivity trends, economic growth has tended to be feeble in the UK’s peer countries. This strongly suggests that raising growth sharply in the UK will be hard.
Yet achieving just this is also vital as Rachel Reeves, the UK’s chancellor of the exchequer, is well aware. In her speech on the topic last week, she argued that “without economic growth, we cannot improve the lives of ordinary working people”. In theory, the government could focus on redistribution instead. In practice, that alternative has already hit the political and economic buffers. In the UK, growth is the priority.
One area on which the government is rightly focused is planning. As the chancellor noted, “the lack of bold reform that we have seen over decades can be summed up by a £100mn bat tunnel built for HS2”. Yes, this is batty. More broadly, as Sam Freedman notes in his excellent book, Failed State, the government has long seemed unable to get things built. One of the main reasons is the ease with which people can block construction. Will this government manage to overcome these obstacles at last? It will also be essential to expand the country’s capacity to build.
To consider what can be done by a country serious about such things, note that China managed to build some two-thirds of the world’s high-speed rail network in two decades. Evidently, the UK will never operate like China — and rightly so. Personally I doubt whether there will even be a modest transformation. One must also not be naive about the speed and scale of the impact on growth. Better infrastructure is arguably a necessary condition for significantly faster growth. But it will not be a sufficient one. Heathrow’s fantasy third runway has become a symbol of what the UK cannot do. But would building it transform growth? I doubt it.
If faster growth requires higher investment, savings would almost certainly also need to rise. Otherwise, an unsustainably large jump in the current account deficit is likely, as the country comes to rely even more heavily on foreign savings. Higher savings and more risk-taking investment will also demand substantial changes in pension systems.
What else will be needed? One requirement is a flexible labour market. A new, dynamic business is inevitably an uncertain one. It is easy to overexpand. But then the business must be able to contract as easily. Without such flexibility, new companies will start elsewhere. Excessively generous protections for workers are sure to militate against the emergence of the new economic activities that growth needs.
While the government is determined to tighten regulation of the labour market, the chancellor has also promised to publish an action plan in March “to make regulation work much better for our economy”. Over-regulation can indeed stifle economic dynamism. But, as we discovered in the financial crisis, “light-touch regulation” can cause devastating economic and social damage. The recent warning from the Bank of England on these risks must not be ignored. Similarly, there always needs to be regulation of environmental damage or of abusive behaviour in the workplace. Balancing these things is hard. But it must be done. Growth matters. But it cannot be the only thing that matters.
Also important will be reform of taxation and spending, It seems incredible, to take just one example, that, as the House of Lords economic affairs committee notes, “spending on incapacity and disability benefits has risen by more than 40 per cent in real terms since 2013 and now stands at £64.7bn. This is around 20 per cent higher than the UK defence budget.” That makes no sense.
Policy and implementation must indeed be systematic and long-term. The UK is not good at either, alas. But it can try to seize opportunities. Donald Trump has put nincompoops in charge of the US public health system, including the National Institutes of Health. The UK should offer those adversely affected the freedom they need. This might transform the country’s position in life sciences, an area of high potential.
The UK is in a low growth hole. The longer it lasts, the deeper becomes the pessimism and the more feeble the animal spirits. It has made bad decisions already, notably the high taxation of jobs. Can it provide the disciplined, yet flexible, approach that is so badly needed? I am sceptical of its success. But I hope to be proved wrong.
