The UK’s Self-Inflicted Economic DECLINE

A look at the many factors behind the UK’s dismal economic performance in the past decade. Why some are international external factors, others are self-inflicted.

Text version

The UK’s Self-Inflicted Economic Decline

Chapters

0:00 State of the UK
0:50 Austerity
2:12 Public Sector Investment
3:34 Taxes going Up
5:51 Dodgy forecasts
8:14 Regional divide
9:28 Productivity puzzle
9:55 Brexit
11:25 Inflation
12:09 Housing
13:09 Balance of Payments
14:06 Overview

Sources:
https://ifs.org.uk/publications/context-march-2024-budget
https://www.ippr.org/articles/state-of-the-north-2024
https://www.jrf.org.uk/political-mindsets/placing-households-at-the-centre-of-the-economy

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Since the financial crisis of 2009 the UK economy has experienced a real decline in economic fortunes last month the UK entered recession but real GDP per capita has been stagnating for over a decade this poor economic performance is creating its own spiral of problems Rising debt low investment and creaking Public

Services recent budgets which sought to boost short-term growth fell flat the Joseph rry Foundation report that on current trends the average household is at risk of being nearly £2,000 worth off by 2029 where did it all go wrong and why without a radical change of direction is it destined to get

Worse in 2010 in the aftermath of a financial crisis the outgoing Chief secretary to the treasury left a note saying I’m afraid was no money it was supposed to be a humorous joke a dark sense of humor but it was capitalized by the incoming government who repeatedly used it as a justification for

Austerity however Cuts in government spending and investment undermined the economic recovery and throughout the 2010s the UK economy struggled the economy was propped up with a sugar fix of ultra low interest rates and quantitative easing but this did more to inflate the housing market than to boost business

Investment the irony of the note was that when it was written in 2010 public sector debt was around 55% of GDP in 2024 today it’s closer to 100% so despite cuts to public services for years of austerity lower economic growth has seen government debt continue to

Rise in the 2010s the bank of England created money to buy government debt making it cheap and easier but now are doing the opposite selling off their Bonds in a process known as quantitative tightening meaning the private sector is having to buy even more debt risking higher interest rates the decline in

Public sector investment is particularly ruing because we are becoming reliant on things built in the 1960s and70s the education budget is one area badly affected by recent austerity and this was manifested in the collapsing School roofs earlier in the year but whilst it fades from the news many other public

Services face similar backlogs and underinvestment the problem is that this long cycle of underinvestment is set to get worse both parties are committed to reducing public sector investment in a bid to meet fiscal targets but the UK has many areas needing more public sector investment and it’s also not just

About spending more but also trying to tackle the UK’s inability to build things the hs2 Fiasco highlighted the serious problems the UK has with investment it’s just expensive to build in the UK compared to other countries bad management expensive planning regulations and political meddling all caused hs2 to run over budget and then

Be partially cancelled leaving the least attractive part of a 50 billion Railway that no one really wants frequent changes to policy is another feature of recent economic management but large scale tax cuts under trust crashed the bond market and this was followed by one of the largest scale rises in taxes in

History corporation tax has been changed four times since 2019 no wonder in business investment is down after large tax Rises last year this year taxes will be slightly cut but as a consequence they are very likely to rise in the future a kind of tax cut sandwich the

Unwelcome truth is that the UK is facing a series of unpalatable choices if we really want to force through tax cuts we will have to deal with another round of austerity on depleted Department wherever you look be it courts education or Healthcare there’s a fraying at the edges and a such as a

Backlog of court cases or waiting lists in health and despite efforts to have selected tax cuts the UK tax shares a share of GDP is rising to record postwar levels National Insurance cuts are clearly outweighed by freezing of income tax allowances another unwelcome development is that the cost of

Servicing US debt has substantially increased in the 2010s ultra low interest rates made it very cheap to borrow but since 2022 interest rates have soared meaning that the UK is paying more on debt interest payments over 120 billion last year it’s unpopular truth but we’re paying higher

Taxes in order to pay for debt interest payments and the big problem is that debt to GDP is forecast to continue Rising because economic growth is expected to remain very low and this is a vicious cycle low growth Rising debt higher interest payments feeding through into lower investment and then lower growth

Again the 2010s was an era of very cheap government boring but the opportunity to invest in say renewable energies was not really taken and the UK became became particularly susceptible to the surge in Energy prices we saw in 2022 it cost 100 billion just to import energy in

2022 however even these forecasts for Rising debt are debatable the OB is legally obliged to model forecasts based on government spending plans the government has stated that overall spending by departments will rise to 477 billion by 2028 however they made no specifications but how this would be achieved it led to

The head of the OB to comment that worse than Fiction there was no effort to explain how this spending will be achieved the problem is that high inflation has eroded the real value of spending but the government is not adjusting upward the spending therefore there’s going to be a

Big squeeze on real spending in the coming years The Institute for fiscal studies warm but unprotected departments could see a real cut of 3.4% % a year for the next four years but another element is that the rapidly Rising population primarily due to high immigration is causing spending per

Capita to be squeezed even more now High immigration does Boost real GDP and tax revenues but unless there’s a corresponding increase in spending on public services per capita Services can actually deteriorate leaving people feeling worse off adjusted for population the cut in Department spending will be closer to 4% in real

Terms and the public are really concerned about the state of Public Services concerns over the NHS is one of the biggest fears of the public and there’s a good reason NHS waiting lists have soared in recent years to record levels however there’s a little hope for a quick decline to pre-co levels ifs

Forecasts only a small decline from preco Peaks leading to a long-term increase in structural waiting list and of course amongst this poor economic performance we have the impact of an aging population placing more demographic pressures on government finances such as health care and pensions whil shrinking the tax

Base and poor health is an increasingly an economic issue as well as social problem buuk seen a sharp rise in long-term sickness causing a decline in labor market participation and labor shortages even as the economy is in recession this is particularly affecting labor productivity and also causing a rise in government spending benefit

Spending on disability allowances has nearly doubled in the past decade now one of the UK’s structural problems is a regional divide with real GDP per capita in London almost double the rest of the country take out London and the UK performance looks even more dismal London is attracting the jobs and

Investment but other regions are struggling and despite Promises of leveling up the North and Scotland and Wales the IPP Think Tank expect Regional inequality to worsen in the coming years funds for leveling up have been dwarfed by Cuts in local government spending and with many councils facing bankruptcy and

A lack of Finance local couns are facing more austerity in the coming years one way to revitalize Left Behind regions is to devolve more power and decision making to local communities but the reality is that local local councils have been starved of funds and it’s likely to continue for the next 10 years

Quite a sharp fall in spending to come now Regional inequality is not just about economics it’s also reflected in life expectancy and healthy life expectancy and this is expected to worsen in the coming years with quite sharp divides between more prosperous areas and the least prosperous areas now

One of the root causes for the UK’s economic problems is a fall in productivity growth with around a 25% Gap compared to the pre crisis Trend growth rate now this is not just a UK issue many advanced economies have seen lower economic growth and lower productivity but the UK is one of the

Worst performances in productivity compared to other countries and it hasn’t been helped by some self-imposed handicaps now the brexit vote of 2016 led to a sharp fall in a pound increasing the price of imports but though admittedly the pound had been falling for quite a few decades but markets were suddenly much more

Pessimistic about the UK economy outside the EU and if you look at the performance of UK based firms on the footy they’ve Fallen significantly behind those firms with a global uh Outreach the brexit deal finally negotiated was much harder than many predicted and it has seen new barriers

To trade with the European Union and so far very little signs of new trade deals with countries like the US the disruption of trade to the EU has seen exports to the EU fall since 2016 and in particular since the UK left the single Market a couple of years ago and even

Now in 2024 new barriers and regulations are still coming into Force making life difficult especially for small and medium-sized firms and brexit was more than just uh trade barriers the uncertainty and frequent changes to policy hit business investment at a time when UK investment was already quite low

One of the lowest in the oecd now the cost of brexit can be exaggerated it’s certainly not the primary cause of the problems the UK faces but various models do suggest a loss of around 4 to 5% of GDP over several years that’s roughly around and half th000 2,000 per person over 10

Years now on the positive side brexit is one area where more pragmatic attitude could see future benefits to trade and investment one of the biggest calls of declining living standards in recent years has been the high inflation combined with low weight growth many workers have seen a fall in real wages

This inflation primarily stemmed from Global factors such as higher gas and oil prices however the UK has experienced relatively higher inflation than many other European countries even those who import a lot of gas so higher food prices are at least partly attributable to some of the brexit effects like devaluation and the higher

Transport cost and this continued inflation in the UK is an issue with the bank of England refusing to cut interest rates despite is going into recession now another thing Weighing on UK living standards is housing in the past uh 10 15 years prices and rents have risen faster than inflation and often faster

Than income the Joseph rry Foundation say that the shortage of housing could see housing costs rise over 15% in the coming years in real terms terms the problem is that the UK has been very ineffective at meeting even fairly modest house building targets since the government step back from building

Social housing the private sector is either unwilling or unable to build sufficient quantities of housing where they’re needed and the result has been higher prices decline in affordability and also a rise in homelessness or forms of homelessness such as temporary accommodation it’s also seen a fall in home ownership rates especially for the

Young and this distorted housing market has increased wealth inequality with housing opportunities increasingly determined by even very high incomes or parental wealth another reason to perhaps explain some of the UK’s problems is the UK’s other form of deficit the balance of payments on the current account since the’re

Relative export sector the UK is in a persistent current account deficit it’s become a net importer of goods from Asian countries like China and kind of persistent deficit tends to put pressure on the government to run fiscal deficits to in order to support the relatively struggling economy and this is not

Unique to the UK the US is also running a twin deficit of high borrowing and high current account deficit and the problem is that to readjust the whole Global structure of the economy is pretty difficult but at the moment the UK is very much High consumption High

Imports and this isn’t good for the long-term sustainability of the economy especially with the disruption to EU trade now all paints a fairly Grim picture and there’s been relatively little effort to convey the true tradeoffs that we Face having two budgets a year doesn’t really help when there’s a tendency to seek short-term

Sticking plaster Solutions rather than long-term change which is not always politically appealing but necessary for the economy the Outlook really is higher taxes Andor lower public services in this video I only briefly touched on the housing market and if you’re interested in that topic this video goes into more

Detail about why the housing market has become more unaffordable and unequal and what if anything can be done about it