Is Britain ready to be honest about its decline?

Britain has strengths, particularly in services. The country is the world’s second-largest exporter of services after the US. This pillar of growth goes well beyond financial services, whose share of exports fell to 9% last year from 12 per cent in 2022.

By Matthew Brooker

Change is hard and requires, perhaps more than anything, honesty. There’s a reason that the 12-step program of Alcoholics Anonymous includes “making a searching and fearless moral inventory of ourselves.” How can we hope to know where we’re going unless we’re willing to understand and acknowledge where we are now? Britain’s greatest challenge in reversing its relative economic decline may be in recognising that it’s happening at all.

London-based think tank The Resolution Foundation performed a service to the cause this month by spelling out, in monetary and percentage terms, just how far the country has fallen behind. Most Britons would consider France and Germany to be comparable nations, doing slightly better or worse on occasion perhaps, but part of the same general neighborhood. So it may have come as a shock to be told just how wide the gap has become. Middle-income households are 20 per cent poorer than those in Germany and 9 per cent behind those in France. It’s even more grim for the low-income group: 27 per cent worseoff than counterparts in both countries.

Versus a wider group of Australia, Canada, France, Germany and the Netherlands, Britain is on average 16 per cent poorer (the US is in a class of its own, being solidly richer): If the UK was to close the average income and inequality gaps with these countries, the typical household would be £8,300 ($10,400) better off. The poorest would see their incomes rise by 37 per cent. The living standards of the lowest-income British households are £4,300 below those of their French equivalents. These are staggering numbers.

These, and a plethora of similar statistics, come from “Ending Stagnation,” a 291-page study that serves as the final report of the foundation’s Economy 2030 inquiry, a two-year project to set out what a serious attempt to end Britain’s relative decline would look like. Some worsening of the country’s comparative position was to be expected, but the scale of the gap that has opened up with Britain’s peers came as a surprise, Emily Fry, a foundation economist and one of the report's co-authors, told me.

The chief culprit is low productivity. The efficiency with which an economy combines labor and capital into outputs is what underpins rising wages and living standards, and is closely related to Britain’s twin problems of subpar economic growth and high inequality. During the 1990s and early 2000s, the UK was catching up with more productive countries such as France, Germany and the US. This came to a halt in the mid-2000s and has been reversing ever since. Britain’s productivity grew by 0.4 per cent a year in the 12 years following the global financial crisis, half the rate of the 25 richest countries in the Organization for Economic Cooperation and Development.

Ending Stagnation covers a vast array of issues and policy challenges, among them: the UK’s persistently low and volatile investment; regional inequalities and the lagging performance of cities outside London; dysfunctional tax and fiscal systems; inadequate housebuilding; planning reform; decentralization of power; trade in the aftermath of Brexit; and the net zero transition.

Few of these issues are new; most of them have been debated for years. It’s striking, then, that last Monday’s all-day conference to launch the report was attended not only by opposition leader Keir Starmer, but also by Chancellor of the Exchequer Jeremy Hunt. That suggests some level of cross-party recognition of the challenges raised by the foundation’s research, and their importance.

This isn’t to be taken for granted. Part of the difficulty in seeking buy-in to the idea that the UK is at a critical crossroads requiring root-and-branch change is that this does not chime with the lived experience of many of those holding the levers of wealth and power. Richer households compare well with their European counterparts; it’s at the middle- and lower-income levels that the gap opens up. Stagnation is a less unpleasant experience at the top of society than in the bottom or middle, as the report observes. 

Inertia, then, is a challenge. So is magical thinking. Britain isn’t going to reinvent itself as a manufacturing powerhouse in the image of Germany. Neither was Brexit a golden pathway to the promised land of Global Britain. The economy has actually become less open to trade (measured by exports plus imports as a percentage of gross domestic product) since withdrawal from the European Union. And Brexit has exacerbated the productivity challenge in some ways: hindering supply chains for the highly integrated and high-value European automotive trade, while increasing low-productivity domestic food production.

It isn’t all bad. Britain has strengths, particularly in services. The country is the world’s second-largest exporter of services after the US. This pillar of growth goes well beyond financial services, whose share of exports fell to 9 per cent last year from 12 per cent in 2022. The UK has successful musicians, architects and lawyers too. This is where trade policy should be focused — on securing service trade agreements with higher-income countries such as Singapore, Australia and Japan — rather than on chasing chimeras.

Millions turning to food banks and 15 years of zero wage growth should have been enough of a hint already that something might need to change, but Ending Stagnation makes a good follow-up case. Is Britain ready for the conversation?