Out of shape: Taking the pulse of the UK economyPublished Thu 17 Nov 2016
Britain is a successful country. We have the sixth-largest economy in the world. We have world-leading companies and an educated, creative and entrepreneurial population. We are a global cultural power. Over the last three years, since the UK economy regained the level of national income it had before the financial crash, the economy has been steadily growing at more than 2 per cent a year. National income is now around 7 per cent higher than it was in 2008 (ONS 2016a).
Yet this picture of top-line success is just that: one of an economy that is succeeding at the top, but facing deep troubles below the surface. Since the EU referendum, successive chancellors of the Exchequer have asserted that Britain is ‘the strongest major advanced economy in the world’ (HM Treasury 2016), and that we enter the Brexit negotiations from a position of ‘fundamental economic strength’ (Hammond 2016). However, the evidence presented in this report shows the opposite: the UK economy has fundamental problems that can no longer be left unaddressed.
The headline figures mask an economy that is not working for the majority of the population. As the chief economist of the Bank of England, Andrew Haldane, has pointed out, GDP may be 7 per cent higher now than in 2008, but when adjusted for the UK’s growing population and income flowing overseas, national income per head has barely grown at all (Haldane 2016). Moreover, the proceeds of growth have not been fairly shared. Median household disposable income has been flat since around 2005, meaning that half of all UK households have seen no meaningful improvement in their incomes for more than a decade (ibid).
We are also a country deeply divided by geography. The recovery has occurred entirely within London and the South East: in no other region of the country has GDP per head recovered to its pre-crisis peak. When a majority of voters rejected warnings, during the EU referendum campaign, not to put the ‘economic recovery’ at risk, they did so precisely because most parts of the country had not experienced any such recovery.
Moreover, the UK economy is vulnerable. It is receiving too little investment, both public and private. Productivity is stubbornly low, and has stalled since the financial crisis. Our balance of trade deficit is large and widening, financed only (as Bank of England governor Mark Carney has put it) by the ‘kindness of strangers’ willing to continue to buy UK assets. We face unknown risks from capital markets that have not been fully re-regulated. Growth is sustained only through the life-support provided by record-low interest rates and continued use of quantitative easing. Rising house prices sustaining more household borrowing for consumption is not a reliable basis for long-term growth.
In this report we identify six symptoms of the deeper problems in the British economy, and in the six chapters that follow we examine each of them in depth.
- Symptom 1: The investment problem
We invest substantially less than our peers in other developed countries, and investment as a proportion of GDP has been declining.
- Symptom 2: The trade problem
We import far more by value than we export, and this problem, too, has been worsening over time.
- Symptom 3: The fiscal problem
The government’s revenue-raising capacity is lower than its spending obligations, and is set to deteriorate further as the population ages.
- Symptom 4: The income problem
Most of the gains from economic growth flow to a small minority of the very richest in society, while those on lower incomes have seen their incomes stagnate.
- Symptom 5: The regional problem
London and the South East perform significantly better than the rest of the UK in terms of income and productivity, leading to widening regional inequality.
- Symptom 6: The carbon problem
We are falling short of the emissions reductions required to achieve our statutory carbon targets, and thereby to meet our global commitments on tackling climate change.
What is striking about these problems is that none of them is a recent phenomenon: each has been steadily growing for at least a quarter of a century. Moreover, as we demonstrate in this report, they are interconnected, with each arising from deeper structural causes.
Taken together, these symptoms suggest that there is something fundamentally wrong with the way our economy works. Its inability to generate a sustainable pattern of economic growth, and to distribute its rewards in ways that benefit the majority of the population, raises a deeper question. That question is not simply one of how to address temporary weaknesses in an otherwise sound model: it is whether the very character and structure of the economy need to be rethought. Addressing these problems will require more profound policy change than has previously been acknowledged.
Brexit forces us to face up to the diagnosis. We have an economy that is not delivering what it should for the British people. The paradox of the Brexit vote – a mandate for change that may make change harder to achieve – requires a far-reaching response.
It is for this reason that IPPR is launching a major new programme: the IPPR Commission on Economic Justice. Over the next two years, the Commission will conduct a comprehensive examination of the British economy. It will look both at its ability to generate wealth, and the fairness with which it works – and how these are related to one another. The Commission’s members have been drawn from across our economy and society. Its research programme will seek to understand the economy as it is experienced by the people who work in it, all over the country – an ambition reflected in the photographs with which this report is illustrated.
The Commission has a high ambition: to rewrite the rules for the post-Brexit economy. It will craft a new vision for the UK economy in 2030, affirm a stronger sense of shared national purpose, and generate long-term policy solutions to Britain’s longstanding economic failings. Its goal is to build sustainable prosperity for all households, sectors, regions and nations of the country – in an economy that properly belongs to us all.