Britain Election Winner’s First Problem: Fix a Stagnant Economy
After more than a decade of deep budget cuts, slow growth and weak productivity, the country has struggled to overcome years of uncertainty and underinvestment.
Reporting from London
“Our economy has truly turned a corner,” Rishi Sunak, Britain’s prime minister, said last week as he introduced his party’s election manifesto, buoyed by recent data showing that Britain’s economy had exited from a recession more strongly than expected in the beginning of the year and that inflation had slowed substantially.
Justifying the optimism, data released on Wednesday showed that consumer prices rose 2 percent in May from a year earlier, touching the Bank of England’s target for the first time since 2021. That was also way down from 11.1 percent in October 2022, when Mr. Sunak started his premiership.
Many economists argue that it will take more than a few good economic indicators to change Britain’s economic path after more than a decade of slow economic growth, chronically weak productivity, high taxes and struggling public services, with a notably underfunded and overstretched National Health Service.
Polls suggest there is a desire to eject the governing Conservative Party from Downing Street, after 14 years, in next month’s general election. But lawmakers in the opposition Labour Party have already warned that — should they win — they will inherit a hobbled economy with little room for bold changes.
How did Britain get here?
A focus on austerity
When the Conservative Party came to power in 2010, the country was reeling from the great financial crisis. Debt had jumped higher, and the country’s budget deficit was at a postwar high.
David Cameron, then prime minister, and his chancellor, George Osborne, placed the burden heavily on reducing government spending, rather than tax increases. What followed were years of austerity as government departments faced huge cuts to their budgets.
Spending for services such as courts, libraries and mass transit was slashed, but so were budgets to make investments, slowing or halting the maintenance and construction of schools, hospitals and prisons. Benefits for the unemployed and low earners were cut deeply.
Britain “had quite a severe program of austerity,” said Anna Valero, an economist at the London School of Economics. It was arguably too deep, and therefore “hampering the recovery, hampering the extent to which our economy could invest,” she added.
A legacy of stagnation
For many economists, the past 14 years have been defined by Britain’s stagnant productivity growth. The amount of economic output for every hour worked has hardly budged. It’s the key determiner of living standards: Wages go up as productivity improves. In Britain, wages, once adjusted for inflation, are at roughly the same level they were at the end of 2007.
“We have to recognize that this is a pretty deep hole that the economy’s got into,” said Diane Coyle, a professor of public policy at the University of Cambridge. “A lot of countries have lower productivity growth. We’ve got none.”
This decade and a half of lost wage growth has cost the average worker 10,700 pounds (about $13,600) a year, according to the Resolution Foundation, a research organization. Middle-income Britons are 20 percent poorer than their peers in Germany and 9 percent poorer than those in France, the think tank estimated.
The enduring effect of Brexit
Though the economic impact of Britain’s exit from the European Union is still playing out, some of the cost of that decision is already apparent. After the referendum, years of policy uncertainty through Theresa May’s government brought business investment to a halt. Then the new arrangement with the European Union erected trade barriers across most industries, making work harder and more expensive for everyone from Scottish fishermen to London’s bankers.
Instead of investing in infrastructure, innovation and skills, Britain’s government was distracted by Brexit for a long time, Ms. Valero said. “If everyone is concerned with how to actually do Brexit, how to make it work and all the political fallout of it, of course, people have less attention to focus on these long-term issues,” she said.
Broken Britain
A long period of low investment and a squeeze on public spending has left many with the feeling that Britain is broken.
Despite the heaviest tax burden in 70 years, many public services appear on the brink of collapse. More than seven million cases are on the N.H.S. waiting list, social care is severely underfunded and understaffed, and spending per school student is the same as it was 14 years ago. Though unemployment is low, there has been a sharp increase in the number people out of the work force because of long-term ill health.
The list of challenges is long and varied: A backlog in the courts means long waits for criminal trials. There’s a lack of affordable housing, and rents are at a record high. Burdensome regulation and the power of local authorities inhibit housing construction but also green energy infrastructure, data centers and labs. The number of people using food banks has doubled in the past five years. Public transport has been hobbled by strikes, understaffing and bad upkeep. And there are endless complaints about potholes all over the country.
The Liz Truss experiment
The turmoil was most glaringly evident in the 49-day premiership of Liz Truss, who set about to change Britain’s economic policy only to have investors balk at her ideas and force her into a U-turn and eventual resignation.
Ms. Truss had the right diagnosis — the need for faster long-term economic growth — but the wrong medicine for Britain’s problem. She hoped to strengthen the economy by cutting taxes and borrowing heavily to do so, right on the heels of large amounts of spending to support households through the economic shocks of the pandemic and energy crisis after Russia’s invasion of Ukraine.
She shattered the Conservative Party’s reputation for good financial management. Since then, policy from both major political parties has focused on showing restraint.
Both parties have pledged not to raise Britain’s three big tax rates — personal income taxes, National Insurance and V.A.T., a type of sales tax. But many people will still find themselves paying higher taxes as their wages increase, pulling them into the higher tax brackets, which will remain frozen for several more years.
What’s next?
Many economists say tax promises will be hard to deliver. There are huge demands to spend more on public services, especially to meet commitments to increase military spending and fix the N.H.S., and other areas of government, like the courts, cannot withstand more cuts. To stick to pledges to reduce debt, taxes will have to go up if spending cannot be cut further.
But the tight situation that Britain’s next leaders will find themselves in could be eased if there is a proper sustained increase in economic growth. So far, Britain’s economic growth has been benefiting from an increase in the population, particularly because of migration. The economy is the same size per person that it was at the last election in 2019.
“If we’re actually thinking about sustainably growing, it comes down to productivity growth,” Ms. Valero said. That would also lead to higher wages and better living standards, which would require more investment in infrastructure, education and innovation, and a planning system that made that investment possible, she said.
In the meantime, voters will decide which political party’s plan for growth they prefer on July 4.⍐
