Britain has huge strengths, but it is now impossible to miss that we’re in a phase of relative decline. A year or two of poor productivity growth and flatlining wages is survivable, but 15 long years of stagnation is not: workers today take home no more than they did heading into the financial crisis. The cost of wages not growing as they used to? £10,700 a year for the average worker.
Slow growth combines with longer-lasting high inequality: the UK is Europe’s most unequal large economy. That combination has proved toxic for people in Britain on middle and low incomes. We think we’re similar to the likes of France or Germany, but our poorer families are now a staggering 27% worse off than their French and German counterparts.
UK politicians are still not serious about turning this around. Some seem to think “world-beating” rhetoric automatically translates into world-beating reality, while others hope there is a magic bullet to Britain’s troubles – be it “taking full advantage” of Brexit, lower taxes or a greener economy.
Instead Britain requires a new economic strategy built not on nostalgia or wishful thinking, but on our actual strengths. Britain has some great manufacturing industries, from aerospace to booze, but there is no plausible route to turning the UK into a German-style manufacturing powerhouse.
While no one likes to celebrate it, Britain is actually the second biggest services exporter in the world (only the US sells more). Our strengths stretch far beyond banking to education and cultural services. And they can be built on: global trade in our services specialisms is growing twice as fast as goods trade.
The services-led nature of our economy also tells us how to release the brake on its growth: our great second cities, such as Birmingham and Greater Manchester, currently have below average productivity but are natural locations for cutting-edge services – such as business services, accountants, architects and lawyers. They must be centre stage, for the sake of Britain’s prosperity, not just their own. They are too big to fail, but their success requires change on a scale not currently imagined.
There is no route out of decline – or to net zero – unless Britain starts investing in its future, rather than living off its past. The UK has been the weakest investor in the G7 over the past four decades, with firms not investing enough in new equipment and kit – and we’re cutting public investment again today. Firms that do invest in Britain make money, but they do so with managers facing little pressure from owners or workers to invest for the long term. The UK’s fiscal rules should be reformed in favour of sustained public investment of 3% of GDP, which neither Starmer’s Labour nor the Tories are currently committed to.
We need to be as hard-headed about getting inequality down as growth up – becoming the US is not the goal. Good work is the bedrock of a fair economy. The minimum wage has been a huge success, but we must go further because even as it has risen, lower earners’ job satisfaction has fallen. No wonder, when half of shift workers get less than a week’s notice of their hours and some ill employees get just £44 a week to live on in statutory sick pay.
A decent society doesn’t let poorer people fall ever further behind, but that is what we have done. Benefit cuts since 2010 have reduced the incomes of poorer households by almost £3,000 a year. The consequences are everywhere to see, as food banks expand and homelessness hits record highs. Shared prosperity requires benefits and the state pension to rise with growth and wages.
The tax take is set to hit an 80-year high this decade, and the need to raise investment, rescue public services and repair public finances means it is likely to stay elevated. But so far its quality has not risen with its quantity. Rather than the burden of tax falling disproportionately on wages, we need other sources of income and wealth to take more of the strain. Landlords can’t carry on paying lower taxes than their tenants.
There are real trade-offs. A higher-investing Britain will need to start saving more. Good work for those on lower earnings will mean higher prices in the likes of restaurants for those on higher incomes. And some will question how realistic it is for the UK, a relatively small and mature economy, to turn its stagnation around.
But fatalism is misplaced. Having fallen so far behind, we now have one huge advantage: catch-up potential. We don’t need to become as rich as the US or as equal as Scandinavia. Closing our productivity and inequality gap with countries we’ve long considered ourselves similar to – Australia, Canada, France, Germany and the Netherlands – would mean British households being more than £8,000 better off. That is a huge prize, worth embracing a new economic strategy for.
Torsten Bell is chief executive of the Resolution Foundation
