News | Analysis of Capitalism - Economic / Social Policy - UK / Ireland - Europe2024 The Absolute State of the British Economy

Domestic crises and global turmoil are exposing the country’s flawed business model



James Meadway,

British Prime Minister Rishi Sunak announces a general election during a press conference in front of 10 Downing Street, 22 May 2024.



Photo: IMAGO / SOPA Images

British Prime Minister Rishi Sunak has called a general election for 4 July. If the timing, earlier than widely anticipated, surprised many, its outcome is in little doubt: Labour has a commanding 20-point lead and is all but certain to win a Parliamentary majority, with only its size currently in serious question. Yet Labour’s huge lead in the polls has more to do with deep public contempt for the Conservatives than genuine enthusiasm for Keir Starmer’s leadership. Labour’s current programme falls significantly short of addressing Britain's long-term economic problems, compromised, as it is, by its failure to address the deep, institutional failures that cause them.

James Meadway is host of the weekly economics podcast Macrodose and a member of the council of the Progressive Economy Forum.

Britain is a low-wage, low-investment, low-productivity economy with crumbling infrastructure, failing national economic institutions, and, in a time of growing global uncertainty, massive exposures to shocks in the rest of the world. It has coasted for many years on the resources enjoyed by a major developed economy and, for the UK, the historic legacy of Empire in the form of its powerful financial system. But it has done little more than that.

Successive crises from the financial crisis through Brexit to the pandemic have begun to expose its flawed business model. Without meaningful radical change in direction, the best-case scenario is that it can continue to coast — at substantial cost for most people who live here. The worst case is a major failure in the future and, potentially, the break-up of the state itself, as demands for national independence in Scotland and Wales recover strength.

The underlying causes of Britain’s relative economic decline are not hard to find, and can be reduced to a single problem: Britain is a chronically low-investment economy, and has been for decades. As the graph below shows, in almost every year between 1995 and 2022, the UK has had the lowest investment spending of any major developed economy. Without investment, machinery does not get replaced, new buildings are not constructed, power stations do not get built, and the infrastructure of a modern economy gradually crumbles.

Figure 1: Investment spending (public and private sectors) as a percent of GDP, 1970–2022. Source: IPPR, 2024

This, rather graphically, is what the UK is living through. School buildings with a lifespan of a few decades, cheaply built before the 1990s, are falling apart: three schools suffered roof collapses just before the start of autumn term in 2023. The backlog of repairs for the National Health Service now comes to 11.6 billion pounds. As any traveller outside of London soon realizes, public transport in much of the country is in a shockingly poor state.

Low investment in the public sector has helped weaken business incentives to invest. Business investment as a share of GDP fell from 12 to 9 percent over 1990 to 2020. Within that, spending on new equipment and machinery, including IT, led the decline, falling from 8 percent of GDP on average in the 1980s, to less than 4 percent from 2009 onwards.

No new investment means missing out on the fundamental driver of productivity improvements over time, which is investment in new equipment, factories, transport systems, and so on. The results can be seen in Britain’s dramatically poor productivity performance, with productivity growth running at essentially zero since the financial crisis. That, in turn, has been a critical factor in suppressing wages: with productivity growth so low, there is little room for companies to pay higher wages, at least before the pandemic.

The low investment trend stretches back decades, but could be covered up for a period. At least prior to the 2007–8 financial crisis, weak investment and underlying productivity growth was compensated for by a combination of expanding financial services, rising property prices, cheap, so-called “flexible” labour, and Britain’s incomplete integration into EU structures. With the dominant international position of the UK’s financial sector as the anchor, Tony Blair’s governments oversaw relatively rapid economic growth, rising real wages, and significant increases in public spending in the benign global economic environment of the 2000s.

This strategic failure of the Coalition government, as well as subsequent Tory administrations, is an important part of Britain’s general malaise today.

Access to EU markets without euro membership granted financial services, for a time, the best of both worlds — an offshore funding centre for Europe and the rest of the world, with privileged access to the world’s largest single market. Blair’s government deliberately did not challenge the neoliberal bias of economic governance in Britain that encouraged privatization and deregulation, in place since at least the years of Margaret Thatcher, and indeed did not feel the need to.

Unfortunately, this success was built on sand: when the Global Financial Crisis of 2007–8 hit, Britain was exceptionally exposed thanks to its massive financial system. The recession was severe, driving up government debt, but, after a brief period of rising investment spending under Gordon Brown, the Coalition government elected in 2010 immediately began cutting public spending — including, critically, 20 billion pounds in real terms cuts to already low investment spending, along with the worst cuts to social spending since the Great Depression.

The government’s economic strategy was to restore the status of the financial system as rapidly as possible, maintain Britain’s insider-outsider relationship with Europe, and reposition the country as close as possible to fast-growing China — particularly to offer its services as a financial dealmaker. Austerity was essential to the first element: by cutting spending today, the thinking was to reduce the size of government debt in the future and, therefore, credibly promise the financial system that it could be bailed out in the future.

Unfortunately, austerity blew apart the second element, with understandable bitterness against spending cuts a decisive factor driving the Leave vote in the 2016 Brexit referendum. Once outside the EU, it ironically became harder for London to maintain a foreign policy position separate from Washington. The sharp anti-China turn of US administrations since Donald Trump destroyed the supposed “Golden Age” of UK–China relations.

This strategic failure of the Coalition government, as well as subsequent Tory administrations, is an important part of Britain’s general malaise today. Cuts to public investment were not compensated for by a flood of Chinese investment — or, significantly, anyone else’s.

Austerity cuts to welfare services have driven a catastrophic increase in poverty, with the use of food banks (free food handouts, provided by charities and religious institutions) soaring from 60,000 claimants in 2010 to 2.99 million by 2023. The total loss to the UK economy from austerity, as compared to maintaining government spending at the levels of previous Labour administration, comes to a cumulative total of 500 billion pounds. Real wages have stagnated as a direct result, and fallen further since.

Figure 2: Average real wage index for the G20 countries, 2008–22. Source: International Labour Organization, Global Wage Report 2022–23

Yet, because the failures are so long-standing, blaming successive Conservative-led governments for them (as Labour predictably do) is not enough. There is a deep institutional failure in Britain, centred on the leading role of the financial system and the close relationships between its powerful joint finance and economics ministry, the Treasury, and the (increasingly dominant) central bank, the Bank of England.

As suggested, the presumed necessity of maintaining a giant financial system has been a driver for austerity over the last 14 years, with the Treasury seeing its own role as maintaining the strength of Britain’s financial system. This also drives its strong London bias, as its own internal decision-making favours areas and sectors that are already economically successful.

What the pandemic and its aftermath exposed, in Britain perhaps more than any other major developed economy, was its dependence on overstretched essential systems.

The Bank of England’s use of Quantitative Easing helped enable austerity, by supporting the economy even as government spending was being cut, and has driven rising inequality via its encouragement of rising property prices.[1] It intervened aggressively against the national government, stoking up financial panic as leverage against the Liz Truss government in September 2022.[2]

The Pandemic and Its Aftermath

When the pandemic struck in early 2022, both the Treasury and the Bank moved rapidly to support lockdowns and sustain high levels of government spending, including a (relatively) generous furlough scheme that paid those in conventional employment, but unable to work, their full income up to a generous upper limit. It excluded some 3.8 million people not in conventional employment, thanks to Britain’s “flexible” labour market, who were forced to rely on the appallingly threadbare conventional welfare system.

The Bank of England effectively provided funding for this, using its powers of money creation in the guise of Quantitative Easing to cover the exceptionally high costs of support throughout 2020 and 2021. The long-term costs of the pandemic are high, as they are everywhere, including an estimated 10 billion pounds per year in additional NHS expenditures and 1.9 million Long Covid sufferers.[3]

What the pandemic and its aftermath exposed, in Britain perhaps more than any other major developed economy, was its dependence on overstretched essential systems. Although the share of renewables has been rising significantly, driven by the raw economics of falling costs rather than governments who, before Boris Johnson, derided the “green crap” of the energy transition, Britain still generates 35 percent of its electricity from gas, More than half of that gas is imported.

When the energy price shocks of 2021 and 2022 hit, the impact on households and businesses was immediate — thanks to its highly “liberalized” and privatized energy supply system, which passed on short-term increases in the spot price of energy immediately to consumers. The Truss government’s response was to set aside 150 billion for an Energy Price Guarantee — breaking with decades of neoliberal doctrine to establish a price cap, albeit a notably inefficient and unfair one.

As food prices surged with the successive ecological disasters, Britain’s massive import dependency was also made obvious. Britain depends on imports from abroad for 80 percent of its food, once fertilizer and other inputs are taken into account alongside direct purchases. Surges in global prices, again filtered through a significantly “liberalized” food system dominated by a few monopolistic supermarkets, turns rapidly into soaring costs for households. As result of these surges, real wages have sharply declined — even after an upsurge of post-pandemic industrial struggle. According to current forecasts, real incomes are unlikely to recover their 2008 levels before 2028 — that would mean two lost decades for living standards, unprecedented in modern British history and worse than any other G7 country.

Labour and the Future

This failure, combined with successive shocks, created a decade and more of political turmoil in Britain. This includes the 2014 Scottish independence referendum, the election of left-winger Jeremy Corbyn to the leadership of the Labour Party, his near-miss election of 2017, the 2016 Leave vote, the difficulties in securing a Brexit deal, and the election of Boris Johnson’s Conservatives in December 2019.

Johnson had a confused but real mandate for change beyond delivering Brexit, centred on “levelling up” (delivering investment outside of London) and a strikingly pro-environmental turn. His government, and those afterwards, have substantially failed to deliver on this. Rishi Sunak is little more than the candidate of the institutions, and has failed to turn around the Conservatives’ fortunes in any sense. The party are today bitterly unpopular, slumping to 19 percent in the most recent polls — their worst polling since World War II — making a Labour victory in the next election almost certain.

This would confirm the stabilization of the country’s basic structures and institutions. Keir Starmer’s Labour Party is overtly seeking to achieve exactly this, deliberately presenting itself as the party of “competent” management of those structures. They have abandoned what progressive radicalism they had, notably including the pledge of a very substantial 28-billion-per-year green investment programme, and are at present committed to maintain and even extend Conservative plans for further spending cuts. They have committed repeatedly to maintaining the finance sector’s leading role in Britain’s economic life.

In an uncertain world, subject to geopolitical and (increasingly) environmental shocks, Britain is, among the major developed economies, most dramatically exposed.

However, in a significant break with precedent, the party leadership (while failing to commit to increased public spending) is talking up the need for government intervention to support key sectors, notably including reshoring manufacturing in the country outside of the South-East. How this will be achieved with substantial spending increases is not clear, but the direction taken here at least suggests that the break with neoliberalism will continue.

But since long-run problems like chronically low investment suggest institutional failure, attempting to competently manage those failing institutions will in reality mean only competently managing failure. Moreover, the pandemic and period afterwards revealed still more fundamental problems with the British economy: its heavy dependence on imported essentials, energy, and food, and the increasingly parlous state of its public services, most notably. Labour has no substantial plan for this, nor, as far as can be told, a clear understanding of the depth of Britain’s problems.

In an uncertain world, subject to geopolitical and (increasingly) environmental shocks, Britain is, among the major developed economies, most dramatically exposed, thanks to both its international dependencies, its crumbling domestic public services, and the worsening quality of its institutional leadership. While it is likely that Labour will win the next election, and potentially substantially, it is unlikely that this will be a happy period of time in office for them. Their vote is already fracturing, notably around Gaza, and fresh crises are highly likely.

As Boris Johnson has demonstrated, in our present circumstances a significant majority in one election is no guarantee of an election win at the next. There are genuine opportunities for forces to the left of Labour’s leadership, but at present, as in the rest of Europe, it is the radical right, in the guise of Reform UK, who are poised to gain from Labour failure.

[1] Simply put, when the Bank of England operates Quantitative Easing, like other central banks, it creates new money (to the tune of 800 billion pounds since 2009), which it exchanges with major financial institutions for government debt. These institutions typically use the new money to buy assets with higher returns — which, in the UK, means property. Thus, property prices are forced up higher through QE.

[2] See the extraordinary intervention of Bank of England Governor Andrew Bailey, threatening to remove financial support from pension funds after the “mini-Budget” crisis of September 2022. This point was made by former Federal Reserve Bank of Minneapolis Governor Narayana Kocherlakota.

[3] The loss to GDP alone from Long Covid has been estimated at 1.5 billion per year.