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Friday, May 24, 2024
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HomeCulture WarThe political establishment is strangling Britain

The political establishment is strangling Britain

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BRITAIN should be booming. Our economy is structurally biased to globally growing industries from financial and professional services to elite education, from media and cultural assets to racing cars, from bio and medical technology to logistics, from niche engineering to tourism. These are all industries growing more rapidly than most. Britain should be a beacon of success. Unfortunately it is not.

The UK’s growth performance may have been creditable over the last 20-odd years relative to the eurozone but compared with other advanced markets it is deeply uninspiring, as indicated by the chart below. This is not therefore a case of advanced nation stagnation and developed world catch-up, but more a case of economic failure across the continent of Europe, UK included.

Growth by region 2005-2021

Source: ONS & Walbrook Economics

Worse, the UK’s so-called competitive advantages of fairly low and stable tax, modest regulation, the rule of law and absence from arbitrary judgement and political stability have either been lost or severely undermined. The political clock is also ticking with a further shift to tax, spend and regulate likely post the next election, just two years away.

The problem is not a new one. It dates all the way back to the roaring 1960s. Indeed, as the chart below shows, UK growth has been in long-term structural decline. Much has been made of current comparisons with the drab and strike-ridden 1970s. Certainly Smash, corned beef and instant coffee have given way to guacamole, sushi and flat white, but at least the 1970s were a decade of decent growth. The 2020s looks like being trouble and union strife without the growth.

UK GDP growth by decade %

Source: ONS & Walbrook Economics

The question is more perplexing because we are living through a period of extraordinary technological advancement which in theory should advance growth, not reduce it. So what’s going on?

As the world celebrated a new millennium, Cool Britannia seemed a pretty good place. It was certainly a competitive place, demonstrated by the low tax environment outlined in the chart below. Little wonder with apparent political stability, the rule of law and a myriad of soft power assets the UK was perceived as an attractive place to invest.

Tax levied as % GDP in 2000

Source: Eurostat

Fast forward to today and the UK has moved from being a tax leader to tax very average and getting worse. Certainly the clear tax advantage the UK had has gone, with ‘the arbitrage’ on other major European countries now minimal.

Tax levied to GDP current %

Source: Eurostat

More importantly, the UK has seen by far and away the greatest increase in the tax rate of any significant European country, Cyprus and Greece excepted, as outlined by the chart below. Indeed the UK has been markedly raising tax while others including Ireland and Sweden, who have both done far better, have been moving strongly in the opposite direction. Are any British services any better for all this extra tax?

Change in % tax levied as a proportion of GDP current on 2000

Source: Eurostat

Tax is only part of the equation. While I accept that it is harder to quantify and more subjective, as a matter of political choice the UK has become theregulation central of Europe, in direct contempt of the instructions of the people who voted to leave the EU partially to get Big Government off our backs.

In terms of Net Zero the UK approach is the most extreme and prescriptive of any country on earth as far as I can see, even though what the UK does makes the square root of almost zero difference given that Britain accounts for less than 1 per cent of global emissions.

Equally, in terms of ESG (Environmental, Social and Governance) the UK has taken a more draconian position than Brussels, replacing the simple prosperity motive with myriad complex and often contradictory goals, clearly adding cost and undermining the country’s competitive position.

A third attraction of the UK was its relative political stability, rule of law and non-arbitrary taxation. In this regard the UK has also become significantly less relatively attractive. Four Prime Ministers in as many years is hardly stable.

More, the attack on property rights, the impact of Government intervention in the labour market and educational markets and the risk of future wealth taxes creates an environment of increasing uncertainty. Worse, all the direction is further to the left of tax, spend, control and regulate.

The bottom line is that the UK’s competitive position has undoubtedly deteriorated and on current trends looks likely to do so further. With the top 1 per cent of earners paying 27 per cent of all income taxes, such a loss of competitiveness is a dangerous strategy for Government particularly with a fiscal deficit (Government borrowing) likely, in our judgement, to exceed £200billion pa.

As Britain’s opportunity has declined, the public sector has grown to become the overwhelmingly important actor in the UK economy. In the early 1990s public spending accounted for 35 per cent of GDP. It peaked in 2020-1 at 52 per cent of GDP, during lockdown. This is the Big State without the Swedish service to match. Lose-lose.

As can be seen from the chart below, the OBR estimates public spending is currently embedded at around 43 per cent GDP, proportionately 22 per cent more than the early 1990s. This is likely to be an underestimate, as public spending tends to be pro-cyclical in a recession. Our central forecast is that the state is embedded at just under 50 per cent of GDP, a level unprecedented for the UK in peacetime.

Public spending to GDP %

Source: ONS & Walbrook Economics

The chart below examines the ONS view of UK productivity growth from the early 1980s. Long-term trend growth, in excess of 2 per cent, which had been pretty consistent since the industrial revolution, has faltered since the Global Financial Crisis (GFC) stagnating at a volatile rate of somewhat sub 1 per cent pa.

UK productivity 

Source: Trading Economics & ONS

Such a mediocre performance is somewhat counterintuitive as we live in an age of unprecedented technological advance in most fields. This should have turbo-charged growth.

While there are a number of factors behind this poor performance, including a decade of central bank intervention keeping the dead alive, the overwhelming factor is the extraordinarily poor bang for the public sector buck.

The ONS provide long-term series examining ‘output per job’. The chart below, looking at key broad sectors, indexed to 1991, indicates a wide variance in output per job by sector with manufacturing leading the way increasing productivity by a factor of 3.2x over that period. Financial sector increased output per job by 72 per cent and professional services by a more modest 7 per cent.

This contrasts with the Government Services sector which was the only sector to see productivity decline over the control period, falling by some 16 per cent, as measured by output per job, in 2021 compared with 1991. This productivity decline has been consistent over many years but the rate of decline has increased markedly since 2019, just at the time when the magnitude of public spending increased materially. This decline can be partly, but not wholly, explained by lockdown.

The Government Services performance is extraordinary as the 1991 economy was pre-digital, which should have given an immense opportunity for productivity gain. One would have expected public service performance to be much more closely in line with the private service sector which saw a 26 per cent improvement in productivity over that period. 

Output per job indexed 1991=100 economy wide comparatives

Source: ONS

The bottom line is that the UK political establishment, rather than encouraging enterprise and growth which would in turn support the tax base, have captured the nation. They have controlled almost every aspect of it either directly through spending, or indirectly through grossly excessive regulation and control and rather unsurprisingly there are neither any good at it, nor understand how success is created.

Through their control to meet social objectives, not outlined in any manifesto I recall seeing, they are slowly crushing the enterprise of this nation and with it they are levelling down which inevitably will impoverish us.

Next year I shall write about how this could rather easily be turned around if there was the political determination so to do. The ideas I will outline are not radical. They are tried and tested, from rebuilding basket-case Britain in the 1980s to the extraordinary success of Hong Kong, from post-Soviet Eastern Europe to defeated West Germany post 1945.

The problem is the political establishment with their extraordinarily low expectations, short-termism, expediency and social engineering. Their interests lie far beyond these shores. We won the Brexit battle. The message has been deliberately neutered. Next we must win the global battle and regain our freedom to act in a moderate and proportionate fashion, trusting the people as the core principle. The people always know better than Big Government.

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Ewen Stewart
Ewen Stewart
Ewen Stewart is a City economist who runs the consultancy Walbrook Economics. He is director of the think tank Global Britain and his work is widely published in economics and political journals.

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