An economic emergency: Low growth and high inequality leave Britain in 'relative decline'

The average British worker produces less than the average French and the average German worker, ITV News Economics Editor Joel Hills reports

There’s more to life than GDP (gross domestic product) but, goodness, economic growth matters. 

Rightly, there is disagreement about how best to generate it and about how the benefits should be shared but it is a basic truth - albeit one that’s not always acknowledged - that there are demonstrable benefits.

An increase in economic growth makes everything better: unemployment falls; government debt is more sustainable; money becomes available to fund public services and, most importantly, living standards rise.

The problem is that for the best part of a generation, British’s economy has struggled to register meaningful growth.   

The pandemic and Russia’s invasion of Ukraine have obviously left most people in the UK feeling poorer but the UK was stuck in a rut long before Covid arrived. 

Average weekly earnings in 2023 are below their 2008 peak. Credit: ITV News

“Britain’s toxic combination of low growth and high inequality has left it falling behind its peers,” argues a new report by the Resolution Foundation.

“Ending Stagnation” is both a blunt assessment of where the economy is failing and a call to arms - setting out a strategy to revive our prosperity.

The Resolution Foundation calculates that 15 years of low growth means the average worker in the UK is earning £10,700 less today than they would have been had the economy continued to expand at its pre-2008 trend.

Not only are we poorer than we would have been but the Resolution Foundation says living standards in Britain are falling relative to the countries we like to compare ourselves to.

The typical household in the UK has a disposal income of £32,500 a year - adjusted for tax and inflation.  

The typical French household is £2,800 a year better off. The typical German household £6,400 a year better off. The American household is £20,700 a year better off. These are material differences.

The picture for lower income households is just as depressing and, over the last fifteen years, the gap between “us” and “them” has widened.

Median household incomes in the UK are lower than in many advanced economies. Credit: ITV News

There is an exception to this rule. High levels of inequality in the UK mean there is a kink in the income distribution.

The wealthiest 10% of British households are as rich as their European peers, indeed in many cases they are richer. Which, of course, is only heartening if you are part of the top 10%.

Productivity is the holy grail. To raise growth and with it living standards, we need to find a way of working more efficiently - of increasing the amount of goods and services a British worker produces each hour. 

As it stands, the average French, German and American worker produces as much in four days as a British worker does in five.

UK productivity has been falling behind the pack since the 2000s. Credit: ITV News

There’s no great mystery to raising productivity. It’s actually pretty simple: Britain has suffered from decades of underinvestment, by both government (public) and businesses (private).

The Resolution Foundation says this fact alone explains almost all of the productivity gap between Britain and France.

“The average OECD country [there are 30] invests 50 percent more than the UK and the results are everywhere to be seen,” explains the report.

“UK hospitals have fewer beds than all but one OECD advanced economy and UK workers spend more time commuting than those in all but two.

Taking the low road: Britain's investment lags the global pack. Credit: ITV News

The Resolution Foundation says higher investment by government and businesses is vital if our economic fortunes are to improve.

The report singles out Birmingham and Manchester as two cities which desperately need investment in transport and housing if they are going to attract firms offering higher-skilled and higher paid jobs.

As it stands, both cities are not only floundering behind London, they are also under-performing when compared with other second cities, in France, Germany and even Italy.

The Resolution Foundation says raising public (government) investment would require higher taxes but it argues taxes will need to rise further anyway, to rescue public services and to repair the public finances.

“Ending Stagnation” reads in many way like an election manifesto. The report is careful not to be explicitly critical of any individual party but the implicit message is clear: the UK finds itself where it is, due in part to political failure. 

Lindsay Judge, Director of Research at the Resolution Foundation, explains responses to the report's findings

“Politicians and policymakers are not getting serious about the scale of the problem and the challenges the UK economy faces,” says Linsay Judge, Director of Research at the Resolution Foundation.

“They talk about being ‘world-beating’ this and ‘world-beating’ that. Instead, they need to get real and think about how they work and where we are now”.

The report maps out a route back to prosperity, while warning it will take time to yield results.

In the first five years, the report calls for:

  • A new set of fiscal rules

  • Public investment to be increased to 3% of GDP (twice the run rate since the 1980s) and held at that level

  • 20 year growth plans for Manchester and Birmingham

  • An overhaul of the Planning laws, making development harder to oppose

  • A higher minimum wage and guaranteed hours for lower paid workers

  • Earnings insurance for those who lose their jobs (covering 60% of income for a three months)

  • Ended the Triple-Lock on pensions and linking benefits to wages (which will have to effect of making them more generous)

  • A fairer tax system with additional revenues to be raised by taxes on wealth (Capital Gains, inheritance and property) rather than income.

In the following five to 10 years, the report would implement: 

  • Workers on boards of all companies with more than 200 staff

  • Fiscal devolution, council tax revaluation and road-pricing

  • A new “UK protocol” to restore access to EU market for British goods

  • New trade deals for services, signed with key advanced economies

The task facing the UK Is to urgently embark on a new path,” says Torsten Bell, Chief Executive of the Resolution Foundation.

“A new economic strategy built, not on nostalgia or wishful thinking, but our actual strengths. Along with honesty about the scale of the change needed, and the trade-offs involved. It’s time for Britain to start investing in our future, rather than loving off our past.” 

The Resolution Foundation’s vision for the future of the British economy is far bolder than either the strategy the government is currently pursuing or the plans Labour advocate.

In a sense, it’s not hard to understand why.

The Resolution Foundation proposes a more generous welfare system, a less generous state pension and higher taxes at a time when the taxes (as a share of national income) have risen to their highest level since the 1950s.

Reform of the planning system has the potential to unlock significant investment, it’s also a potential vote-loser, as the HS2 project has demonstrated.

Keir Starmer and Jeremy Hunt are both set to respond to the report at today’s conference in London. How daring are they willing to be?

A general election is a year away at the most.

The political stakes are high but so too are the economic stakes. Politicians of all stripes will be conscious that governments that can’t improve living standards tend to run into difficulty. 

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