Why the UK Got Stuck in A Cycle of Decline

A look at some reasons for low growth in UK for past few months.

00:00 Austerity
01:06 The Truss Moment
2:18 Credit Crunch
4:32 Bank of England
5:23 Low investment
6:13 Brexit
7:46 Labour Market woes
9:18 Labour Plans
10:14 Reasons to be Optimistic

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when things start to get wrong it can become a self-fulfilling prophecy in 2010 when Cameron and Osborne hinted the UK was close to bankruptcy they rushed through a period of austerity which ctail the UK’s economic growth and hence ability to raise tax revenue 14 years after the start of austerity and the ifs warm the UK as a black hole in its finances the only difference between now and then is that the tax share has soared from 32% of GDP to 38% this does not reflect more spending on public services but an economy in Decline leaving a legacy of longer waiting lists and underinvestment disillusioned by several years of stagnant wages and Regional inequality in 2016 British voters plumped for brexit on the grounds it couldn’t get much worse but maybe it did far from solving the UK’s difficult problems brexit created a few new ones such as lower growth and more instability in 2022 list trust came along and rightly diagnosed that the UK had a growth problem but as she and the rest of the country soon found out wanting higher growth and achieving it can be two very different things a blitz of tax cuts for the rich saw Market spooked interest rate sworded and after a few eventful weeks was forced into a U-turn it seemed the UK didn’t have a Magic Money Tree after all if we take into account population growth real GDP per capita has grown at the lowest level in the postwar period even worth from the so-called crisis years of the 1970s but does that mean the UK is doomed to be stuck in the cycle of low growth low investment and falling tax revenues or is there a way to turn things around maybe it will come from an unexpected Source it wasn’t always like this in the 1990s and 2000s the UK recorded pretty impressive economic growth low inflation combined with a increase in spending on public services such as Healthcare so what went wrong well part of the boom years was due to the rapid growth in the finance sector and when the credit crunch hit in 2008 the UK was particularly hard hit by the loss of in tax revenues the pound devalued 30% and the UK struggled to recover it was not helped by a long-term decline in manufacturing a decline which began in the 1980s but continued even after the credit crunch the credit crunch really hit the UK economy hard and this meant that the effects of austerity were magnified both private and public investment have struggled and it has left for UK with the lowest rate of investment in the G7 the result is that the UK risks getting left behind on new technologies from artificial intelligence to renewable energy by contrast in the US the government had bold intervention and that saw a surge in manufacturing construction and uptake of new green technologies by contrast the UK is characterized by much more timid levels of investment one of the few projects to escape the austerity acts was hs2 a controversial 30 billion Railway which due to Runaway costs a decade later had become a30 billion Railway and so the government felt obliged to cancel this main investment project of the UK it was symbolic of the UK’s difficulty in building things compared to other countries the UK is simply more costly more bureaucratic and more prone to political interference you wouldn’t see France building a tunnel simply to protect the views of local constituents the difficulty in building is perhaps most acute in housing compared to other countries the rate of building in the UK has fallen behind leaving an estimated 4.3 million missing homes it is one of the reasons for the surge in house prices and rents which created a double wammy of low wage growth and Rising Health costs which particularly affected the younger generation now going back to austerity in the aftermath of a recession the bank of England responded by pulling all the monetary levers we had a decade of near zero interest rates plus an unprecedented 800 billion pound of created money unfortunately rather than creating real investment quantitative easing did more to show up asset prices house price to income ratio reached a record level in 2022 the bank of England admitted that QE did push up house prices it was a period of ultra low interest rates and very cheap borrowing costs but wed to an ideology of austerity the government were look to invest in infrastructure despite impressive private sector growth and offshore wind development the 2010s were a missed opportunity to diversify the UK’s energy needs away from natural gas Imports in a bid to cut the green crap UK plans to invest in insulation for homes were scrapped in the short term this might have saved a bit of money but the energy crisis of 2022 when Energy prices tripled meant that the cutting of insulation subsides proved a false economy even with a government bailout energy Prices rose rapidly faster than wages creating a cost of living crisis now of all the economic crisis in the past 14 years this was perhaps the least to do with the government directly it was truly a global phenomenon nevertheless it did highlight all the missed opportunities of insulating Britain and becoming less reliant on the import of energy the EU referendum of 2016 was a simple question to quite a complicated topic it’s easy to dislike EU membership but as Theresa May found out finding a deal with majority support was almost impossible the eventual deal negotiated by Boris Johnson took Britain out of not just the single Market but the Customs Union as well it led to a jarring increase in costs and tariffs for firms trading with Europe exports to Europe suffered Food Distributors are still struggling with new regulatory checks which has seen lorries delayed for several hours a range of studies suggest that the UK economy is around 4 to 5% smaller compared to if it stayed in the EU it’s not the biggest drag on economic growth but by 2030 an average person could be around £2,300 worth off compared to if we had stayed in the EU now the good thing about brexit is that there is a scope for future government to boost economic growth without requiring any higher spending or tax or borrowing regulatory alignment and rejoining the Customs Union it’s definitely not straightforward but it would enable a reduction in business costs and improve trade a big issue of brexit was immigration the iron is that ending free movement with Europe led to even higher levels of migration now what was a record influx of people magnified rent inflation the problem is that the UK labor market has had continued shortages in certain key areas like care workers and healthcare workers and this creates an economic pressure to take more migrants to fill labor vacancies and this highlights a real problem facing the UK economy we’ve seen a fall in participation rates caused by long-term sickness and early retirement now net migration does tend to be a net fiscal benefit to the government and if you move to a big cut in Immigration levels it may squeeze government revenues even further creating a difficult tradeoff also the university sector is another relatively successful part of the UK economy gaining 440 billion in Revenue clamping down on foreign students is another example of a UK turning its back on what it is relatively good at now Liz trust may have only lasted 44 days but she did inadvertently coin a new phrase aist TR moment this refers to a spectacular Bond crash in response to irresponsible government fiscal stimulus the argument is that with high debt Bond vigilantes are waiting just around the corner and any unfunded increase in debt would lead to a massell off of bonds collapse in the currency and economic Armageddon now it is actually a bit misleading the list trust crisis was probably more to do about trying to boost demand when inflation was 10% but in the popular imagination it was all about borrowing as a consequence labor have revised their ambitious 28 billion of green investment to a more conservative 15 billion it’s less than 0.75% of GDP and it contrasts with Biden a new green deal of a potential 1.1 trillion or 4% of GDP and the US economic boom does show that growth is possible in the advanced world and you can escape the cycle the UK has found itself in Real GDP per capita stagnant since 2019 but is it fair to compare the UK and the US the US does have a few advantages the UK doesn’t have firstly the US has a much greater ability to borrow and secondly as well as all the green investment the US has become the world’s biggest oil producer and the world’s biggest exporter of liquid natural gas this option isn’t open to the UK North Sea oil is in Decline but by contrast to the US starmer’s Labor is painted as too conservative unwilling to fix Public Services by raising any meaningful tax increases yet committed to debt rules which will limit borrowing and any meaningful level of investment M it looks like there’s a risk of more austerity lower investment and that ongoing negative spiral of a self-reinforcing lower growth however is there a more optimistic outcome rather like 1997 the labor party May inherit an economy which is actually doing better than outer appearances may suggest inflation has fallen to 2% despite some lingering Sur SE inflation it should remain low enough for interest rates to come down a little and it would enable real wage growth to remain positive and after all the turmoil of recent years self-inflicted and external the UK could in theory be entering a period of Greater stability if planning restrictions are eased it could see an upturn in private sector investment especially in housing in the past 2 years consumers have actually built up more savings and a period of improving real wage growth and lower interest rates could encourage them to spend so there is a scenario where the UK starts to recover some of a lost output of recent years however before we get too carried away there is a real spanner in the works the UK’s productivity growth fell off a cliff in 2009 and never really recovered OB forecasts are actually premised on productivity growth of 1 a half% a year but this almost certainly will have to be downgraded after the election leading the government to be in an even worse fiscal position than they think at the moment turning around productivity growth is easier said than done especially in the public sector where it’s particularly bad but this is a real Challenge and without higher productivity growth the UK will remain a stagnant economy also is there any actual real hope that the housing market will become more affordable this video looks into the prospects of the UK housing market k