Why Britain has stagnated

Foundations

Why Britain has stagnated

Setting the scene

Here are some facts to set the scene about the state of the British economy.

Between 2004 and 2021, before Russia’s invasion of Ukraine, the industrial price of energy tripled in nominal terms, or doubled relative to consumer prices. With almost identical population sizes, the UK has under 30 million homes, while France has around 37 million. 800,000 British families have second homes compared to 3.4 million French families

. Per capita electricity generation in the UK is just two thirds of what it is in France (4,800 kilowatt-hours per year in Britain versus 7,300 kilowatt-hours per year in France) and barely over a third of what it is in the United States (12,672 kilowatt-hours per year). We are closer to developing countries like Brazil and South Africa in terms of per capita electricity output than we are to Germany, China, Japan, Sweden, or Canada.

Britain’s last nuclear power plant was built between 1987 and 1995. Its next one, Hinkley Point C, is between four and six times more costly per megawatt of capacity than South Korean nuclear power plants, and four times as expensive as those that South Korea’s KEPCO has agreed to build in Czechia.

Tram projects in Britain are two and a half times more expensive than French projects on a per mile basis. In the last 25 years, France has built 21 tramways in different cities, including cities with populations of just 150,000, equivalent to Lincoln or Carlisle. The UK has still not managed to build a tramway in Leeds, the largest city in Europe without mass transit, with a population of nearly 800,000.

At £396 million, each mile of HS2 will cost more than four times more than each mile of the Naples to Bari high speed line. It will be more than eight times more expensive per mile than France’s high speed link between Tours and Bordeaux.

Britain has not built a new reservoir since 1992. Since then, Britain’s population has grown by 10 million.

Despite huge and rising demand, Heathrow annual flight numbers have been almost completely flat since 2000. Annual passenger numbers have risen by 10 million because planes have become larger, but this still compares poorly to the 22 million added at Amsterdam’s Schiphol and the 15 million added at Paris’s Charles de Gaulle. The right to take off and land at Heathrow once per week is worth tens of millions of pounds.

The planning documentation for the Lower Thames Crossing, a proposed tunnel under the Thames connecting Kent and Essex, runs to 360,000 pages, and the application process alone has cost £297 million. That is more than twice as much as it cost in Norway to actually build the longest road tunnel in the world.

These are not just disconnected observations. They highlight the most important economic fact about modern Britain: that it is difficult to build almost anything, anywhere. This prevents investment, increases energy costs, and makes it harder for productive economic clusters to expand. This, in turn, lowers our productivity, incomes, and tax revenues.

Everyone reading this will already be aware of the country’s present economic sclerosis. Real wage growth has been flat for 16 years. Average weekly wages are only 0.8 percent higher today than their previous peak in 2008. Annual real wages are 6.9 percent lower for the median full-time worker today than they were in 2008. This essay argues that Britain’s economy has stagnated for a fundamentally simple reason: because it has banned the investment in housing, transport and energy that it most vitally needs. Britain has denied its economy the foundations it needs to grow on.

From 2010 to the summer of 2024, Britain was run by Conservative-led or Conservative Governments. The Conservatives are the traditional party of business, and in the 1930s and 1980s they pushed through reform programmes that successfully renewed Britain’s economy. Virtually any Conservative minister from the past fourteen years would speak warmly about that heritage if asked, and would express the hope of being its inheritor. And yet, with honourable exceptions, the governments of the last fourteen years failed in this vocation. Failing systems remained unreformed, continuing to stifle Britain’s prosperity. Today Britain is ruled by a Labour Government that recognises this failure to build, and which has articulated high ambitions for changing this. But it remains doubtful that they will be any better at delivering on those ambitions than the Conservatives were.

Constitutionally, British governments have immense power. How has a series of governments with both the will and the means to deliver systemic reform failed to do so? How can it be that the overwhelming experience reported by former ministers and advisors is one of disempowerment – of a ‘blob’ operating beyond their control, of pulling levers and nothing happening, of a vast dysfunctional machine slowly disintegrating on autopilot?

We believe that Britain’s political elites have failed because they do not understand the problems they are facing. No system can be fixed by people who do not know why it is broken. Like the elites of Austria-Hungary, Qing Dynasty China, or the Polish Commonwealth, they tinker ineffectually, mesmerised by the uncomprehended disaster rising up before them.

If any government, Conservative or Labour, wishes to use its powers to improve the country, it needs to understand which of Britain’s institutions have failed, and why they have done so. Only then can they begin to develop a systematic programme of reform that will restore Britain’s economy to strength and its society to vitality. The alternative is continued drift, relative decline, political disenchantment, and a nation unable to meet the great challenges of our time. This essay is a first attempt at offering such a diagnosis.

Falling behind

Britain is a country of immense achievement. For most of modern history, its people were the richest, healthiest and best educated in the world. Its housing stock and its infrastructure was far more advanced than those of any of its rivals. It led the Scientific and Industrial Revolutions. Its institutions were almost uniquely liberal. Though British history contains its share of missteps and tragedies, there is probably nowhere else on earth that matches its achievements since the mid-eighteenth century, relative to its size and resource endowments.

Many of these underlying strengths remain. The British people value debate and heterodoxy. They respect science, law and institutions. In hours of crisis, like the Russian invasion of Ukraine, they display unity and good sense. However inefficient and dysfunctional they may be, British institutions are strikingly incorruptible. One of the scandals of the decade is the alleged embezzlement of a campervan, an offence that would surely bring a contemptuous smile to the lips of a Putin or a Berlusconi.

Despite these strengths, Britain is falling behind the developed world in economic dynamism. It led the world in the nineteenth century, and then Europe during the first half of the twentieth, but it lost its leadership after the Second World War. Since 2008, it has been clearly underperforming most of the developed world, even some of its more heavily taxed and regulated continental neighbours.

Most popular explanations for this are misguided. The Labour manifesto blamed slow British growth on a lack of ‘strategy’ from the Government, by which it means not enough targeted investment winner picking, and too much inequality. Some economists say that the UK’s economic model of private capital ownership is flawed, and that limits on state capital expenditure are the fundamental problem. They also point to more state spending as the solution, but ignore that this investment would face the same barriers and high costs that existing infrastructure projects face, and that deters private investment.

Others believe that our ageing society means permanently lower growth and higher taxes. Dietrich Vollrath’s book Fully Grown: Why a Stagnant Economy is a Sign of Success says that slower growth is an inevitable part of becoming services-driven (and of birth rates declining). Another school of thought sees Britain’s 2010s performance as ‘one thing after another’, with a slow recovery from the financial crisis followed by Brexit, followed by Covid.

But all of these explanations take the biggest obstacles to growth for granted. Our economy isn’t growing for the same reason that no more planes take off or land at Heathrow today than did twenty years ago: at some point it becomes impossible to grow when investment is banned.

Over the past two decades, Britain’s economy has needed a huge quantity of new housing, transport infrastructure and energy supply. Its postwar institutions have manifestly failed to deliver these. Britain is now a place in which it is far too hard to build houses and infrastructure, and where energy is too expensive. This has meant that our most productive industries have been starved of the resources, investment and talent – the economic foundations – that they need to grow.

The UK faces other challenges besides these. Our healthcare and higher education systems are so broken that politicians elected on a clear mandate to cut migration instead let it rise to unprecedented levels to keep them afloat. Crime, though it has been falling for years, is substantially higher than it was in pre-Second World War Britain, despite a far older population. It is also significantly higher than in many other European countries including the Netherlands, Spain, Austria, Switzerland, Norway, and Italy. Childcare is so expensive that many families have fewer children, and later in life, than they would like. Our tax system is riddled with distortions and perverse incentives. There is no consensus about what our higher education system is supposed to do, who should benefit from it, and who should pay. And our political institutions are sclerotic: at best, many are unable to perform their most basic functions; at worst, they are a huge barrier to innovation and effective governance.

But these other challenges do not explain why a huge economic gap opened up between us and other leading economies, since problems in immigration, crime, childcare, tax, and political institutions are also found in exactly the countries that have pulled away from Britain economically since 2008. Nor can austerity or the hangover from the financial crisis explain Britain’s malaise. The financial crisis was at least as turbulent in the United States as here. And austerity was at least as tough across Europe, which also had to fend with the euro crisis.

The Office for Budget Responsibility’s estimate of the impact of Brexit says that it will knock four percent off long-run UK productivity. This would be very painful, but still only a small fraction of the growth we have missed over the past fifteen years. (It also does not factor in the positive effect of avoiding destructive regulations like the EU Artificial Intelligence Act and Digital Markets Act.)

Britain’s startling underperformance more recently is explained by the more basic factors this document focuses on: preventing investment into housing, infrastructure, and energy supply.

Prosperity is intrinsically important. It gives people security and dignity, leisure and comfort, opportunity and economic freedom. It gives us freedom to pursue our other national goals: caring for older and less fortunate members of society, upholding a law-governed international order, preserving and enhancing our landscapes and townscapes, and leading the way in world-changing scientific research.

But there is even more at stake here than that. We noted above the enduring strengths of the British social settlement – responsibility, autonomy, love of debate, respect for the individual. Economic failure saps confidence in these things. It begets dependency, resentment, defeatism, division and bitterness. It turns win-win relationships into zero-sum ones, where someone else must fail for you to succeed. Economic reform is not only the key to prosperity: it is the key to preserving and amplifying what is valuable about our society itself.

A short history of British productivity

Britain’s biggest problem is its low productivity – that is, the value of the goods and services people produce per hour they work. Before the pandemic Americans were 34 percent richer than us in terms of GDP per capita adjusted for purchasing power, and 17 percent more productive per hour. (Purchasing power parity, or PPP, attempts to account for differences in purchasing power between countries, rather than just using exchange rates). The gap has only widened since then: productivity growth between 2019 and 2023 was 7.6 percent in the United States, and 1.5 percent in Britain. This is not a general Western European problem either: the French and Germans are 15 percent and 18 percent more productive than us respectively.

Historically, this is exceptional. For most of modern history, Britain has been more productive than its peers, and when it has started to fall behind, it has successfully reformed itself to regain its advantage. Between the mid-eighteenth century and the late nineteenth century, Britain was the world’s leading economy. Though it was overtaken by the United States by the beginning of the twentieth century, it remained Europe's leading economy until the early 1950s, with the continent’s highest productivity and living standards, and its most advanced innovating firms.

Output per capita, current prices, 1947-1980. Britain entered the postwar era with a huge advantage over Europe, which it rapidly lost, falling behind both France and Germany Privatisation, tax cuts, and the curbing of union power fixed important swathes of the UK economy. Crucially, they tackled chronic underinvestment in sectors that had been neglected under state ownership. Political incentives under state ownership encouraged underfunding – and where the Treasury did put money in, it tended to go on operational expenditures (e.g., unionised workers’ wages rather than capital investments). This problem has immediately reemerged as the Department for Transport has begun to nationalise various franchises (which it promises to do to all of them).

Between 1980 and 2008 Britain returned to its position as one of Europe’s most successful large economies. For the most part, Tony Blair’s governments were able to sustain these advances. In 2005 Britain’s GDP per capita was just 2.8 percent behind Germany’s, in purchasing power parity terms, and fully 20 percent higher in US dollar terms, according to the World Bank. Penn World Tables, the other major source, have the UK overtaking Germany on GDP per capita in the mid-2000s.

Britain’s relative success during this period is clearest when compared to other major economies. The chart below shows GDP per capita in France, Germany, Italy and the UK as a percentage of US GDP per capita. It shows Britain, after decades of relative stagnation, beginning to converge on the United States and overtake the other European countries from the early 1980s. Britain’s change of fortunes under Thatcher, and continued improvement under Blair, is clear.

But crucial parts of the economy were still left unfixed – notably land-use planning policy, which Thatcher’s Environment Secretary Nicholas Ridley had tried and failed to reform, and which Tony Blair’s government was unable to make a dent in either.

This left Britain with latent weaknesses that have become hugely problematic over the last quarter of a century. Since the 1990s, Britain has experienced rapid population growth, after decades of demographic stability, and big shifts in prosperity from some parts of the country to others. The decision to transition away from fossil fuels has created the need for huge quantities of new energy infrastructure, recently exacerbated by the war in Ukraine, but by no means beginning then. Across the developed world, great metropolitan agglomerations have become even more economically important. London has been among the biggest winners from this trend, in spite of the obstacles in its way.

What Britain needed in the last 25 years above all was a huge amount of building – of homes, energy supply, and transport infrastructure. Without it, Britain has fallen behind, weighed down by a development system that worked badly even in the 1950s and 60s, and that is positively disastrous today.

That gap continues to grow. Between 2010 and 2019, worker productivity grew by eight percent in the United States, 9.6 percent in France and just 5.8 percent in Britain. And those countries’ growth rates pale in comparison to that of Poland, which has grown its productivity by 29.7 percent between 2010 and 2019, and on current trends will overtake Britain by the end of this decade.

To put the shortfall since 2008 into perspective, if Britain had grown in line with its trend between 1979 and 2008, it would be 24.8 percent more productive today. Assuming we continued working the same hours annually, that would mean a GDP per capita of £41,800 instead of £33,500, making the typical family about £8,700 better off before taxes and transfers. Tax revenues would be £1,282 billion instead of £1,027 billion, assuming tax rates are held constant. That would mean that, instead of a deficit of £85 billion, on current spending we would have a surplus of £170 billion, meaning that taxes could be much lower, and public services could be better funded.

Though these figures may seem improbably high, they are not out of line with the world’s richest economies, and there is no reason Britain should not aim to sit among them as it once did. This essay argues that Britain can do so by adopting a programme of reform similar in its scale of ambition to that of the programme of liberalisation in the 1980s. Where earlier reforms were focused on cutting taxes, curbing the power of the trade unions, and privatising state-run industries, this time we must focus on making it easier to invest in homes, labs, railways, roads, bridges, interconnectors, and nuclear reactors.

The importance of strong foundations

Why is France so rich?

France is notoriously heavily regulated and dominated by labour unions. In 2023, the country was brought to a standstill by strikes against proposals to raise the age of retirement from 62 to 64. French workers have been known to strike by kidnapping their chief executives – a practice that the public there reportedly supports – and strikes are so common that French unions have designed special barbecues that fit in tram tracks so they can grill sausages while they march.

France is notoriously heavily taxed. Factoring in employer-side taxes in addition to those the employee actually sees, a French company would have to spend €137,822 on wages and employer-side taxes for a worker to earn a nominal salary of €100,000, from which they would take home €61,041. For a British worker to take home the same amount after tax (£52,715, equivalent to €61,041), a British employer would only have to spend €97,765.33 (£84,435.6) on wages and employer-side taxes.

And yet, despite these high taxes, onerous regulations, and powerful unions, French workers are significantly more productive than British ones – closer to Americans than to us. France’s GDP per capita is only about the same as the UK’s because French workers take more time off on holiday and work shorter hours.

What can explain France’s prosperity in spite of its high taxes and high business regulations? France can afford such a large, interventionist state because it does a good job building the things that Britain blocks: housing, infrastructure and energy supply.

Housing supply is vastly freer in France. Overall, it now has about seven million more homes than Britain (37 million versus 30 million), with the same number of people. Those homes are newer, and are more concentrated in the places people want to live: its prosperous cities and holiday regions. The overall geographic extent of Paris’s metropolitan area roughly tripled between 1945 and today, whereas London’s has grown only a few percent. France has allowed its other great cities to grow and flourish too, whereas Britain has systematically constrained and undermined them for seven decades.