Examining the Case of Britain’s Perpetually Anaemic Growth

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The latest statistics from the Office for National Statistics, published in July 2023, revealed that output per hour worked in Q1 2023 was just 0.6% above its pre-pandemic (2019) average. This has been a continuation of the slow growth that has been on display between 2008 and 2019, with productivity growing at an average rate of 0.27% per year, bucking the trend between 1974 and 2008, where productivity grew at an average rate of 2.3% per annum. While growth in Western countries has all been plagued by an overarching malaise, the UK’s case is particularly unique, in that annual growth rates for the US and France were 1% and 0.7%, respectively, in the same time period between 2008-19. Furthermore, the problem is also apparent outside of productivity, with the UK ranking below the averages of the US, Canada and Australia for % growth between 2007 and 2022 in income for low earners, GDP per capita, as well as life expectancy. This productivity issue is more than an abstract economic concept for think tanks to ponder over, with real-life implications, shown through a study that demonstrated if Britain’s productivity growth rate had not fallen after 2008, GDP per capita would have been £6,700 ($8,380) higher than its current level. 

What is to blame is not as apparent as the figures might suggest, and an orthodox economic analysis does not immediately reveal the culprit. Common economic consensus and political blame games go straight to tax rates, and the debate surrounding it dominates headlines and sound bites. However, this anaemic growth has taken place against a backdrop of a corporate tax rate that is significantly lower than other G7 countries and its tax revenue as a share of GDP, 32%, below the averages of both G7 and OECD countries. Thu, the usual diagnosis of high tax stifling growth does not seem to hold up in the face of the UK’s transition from a high-tax to a low-tax country. Another traditional prognosis that workers simply are not working enough also seems to be unsound, as not only does the UK rank fifth in European countries for hours worked in a full-time job per week, but also the gains in growth are much less than those of productivity. This mismatch suggests Britain’s meagre growth has come not thanks to higher efficiency but rather from working more.

An aspect in which the UK economy suffers relative to its counterparts is chronic underinvestment, both in the public and business sectors, which, through its structural nature, has resulted in a ripple effect of interconnected malaises in the economy. Public investment collapsed from a long-term average of 4.5% of GDP between 1949 and 1979 to around 1.5% after 1979. Similarly, the share of the UK’s GDP dedicated to business investment has been trending downwards since the early 1960s. This underinvestment has tangible implications, with the Resolution Foundation’s recent report “Beyond Boosterism” suggesting that ‘had UK business investment matched the averages of France, Germany and the US since 2008, UK GDP would be nearly 4% higher than what it is today’. Furthermore, another regrettable consequence of this underinvestment is that it furthers the country’s deep regional inequalities and accentuates its role in hampering growth. This can be viewed through examining London’s role in the economy. For example, removing London’s output would reduce British living standards by 14% and drop its GDP per capita behind that of Mississippi, the poorest US state.

Comparatively, removing Amsterdam from the Netherlands would reduce 5%, San Francisco from the US by 4% and Munich (Germany’s most productive city) from Germany by only 1%. Furthermore, it takes the average worker in the UK’s second and third-largest cities almost five days to produce the same amount as London’s average worker manages in three. The chronic underdevelopment is also evident in the lack of public transport in cities outside of London and thus commuters having to rely heavily on cars, thus creating a lack of intra-city connectivity, which results in unrealised productivity gains of an estimated £23bn each year. The realities of underinvestment are also apparent in education and skills shortages, with a lesser proportion of UK students remaining in 16+ education relative to OECD countries and lesser investment in vocational schools. The Learning and Work Institute, a think-tank, forecasts skills shortages to cost the UK £120bn by 2030.

While what captures attention and makes for catchy sound bites may be the usual culprits of workers not working hard enough or tax rates being too high, there are undeniable ramifications of chronic underinvestment in the economy. GDP growth booms are nine times more likely if investment is also booming, and the macroeconomic climate the UK has found itself in with Brexit and increasing political instability, with over ten changes to corporation tax and nine business secretaries since 2010, even more cause of concern. Fitch expects a slowdown of real growth rates between 2023 and 2032 relative to 2010-2019 due to what it cites as ‘major persisting headwinds’. It seems that without a complete overhaul and structural changes for supply-side improvements, the UK economy will continue to stutter.

Written by Sarp Basaran

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