The UK economy is stagnant — and the reasons run deep

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In the end, the survival instincts of his political party trumped Boris Johnson’s determination to survive. This is great news. However, he is still a very important political leader. He has changed the way that core issues are discussed from being solved to being represented. This is especially true for Brexit, his lasting legacy. Johnson’s insistence on the trappings of sovereignty delivered almost the hardest possible Brexit. The threat is realTo break the Northern Ireland ProtocolIf he survives, it may be a miracle, but worse could follow.

Brexit is not the biggest challenge facing British policymakers. The most important thing is easy to explain and difficult to solve. This is the long-term stagnation and decline in productivity and real earnings. This problem is what the country will not be able to fix. The dreadful long-term performance is what makes the current cost-of-living crisis so severe.

In its latest report, the Resolution Foundation points outAudit of Living Standards, the 15 years between 2004 and 2019 — pre-Covid and pre-Brexit — were the weakest for growth in gross domestic product per head since the years between 1919 and 1934. Low GDP growth per head led to low household real disposable incomes. The non-pensioners saw a 12 percent increase in their incomes between 2004-05 & 2019-20. This is compared to an average increase of 40% every 15 years since 1961.

Changes in income distribution have also been significant. Between 1980-1995, the median non-pensioner household real incomes increased by 37%, 67%, and 3% respectively. Between 1992 and 2007, incomes increased by 41 percent, 47 percent, and 37 percentage respectively. This was a rapid and shared growth that was undoubtedly far superior to today’s slower pace. But then, between 2004 and 2019, as median incomes rose by a mere 12 per cent, the top decile’s rose 11 per cent and the bottom’s 2 per cent: that was stagnation all round. After the US, 2018, high-income democracies had the second-worst distribution of disposable incomes.

The performance since the financial crisis is not just bad by the UK’s historical standards. It is also worse than its European counterparts. The Resolution Foundation reports that between 2007-2018, real median household disposable incomes adjusted for purchasing power fell by 2% in the UK. They also increased by 34% in France, 27% in Germany, and 23% in the Netherlands over the same time period. In the UK, median household incomes fell well below their western European counterparts: they were 9 percentage points lower than those in France, 16 percent below those in Germany, and this despite high unification costs.

This is also true in other areas. According to the Conference BoardThe UK’s hourly output fell from 84% of German levels in 2007, to 81% in 2015, and 79% in 2021. The UK’s relative GDP per head has also fallen, from 92 per cent of German levels in 2007, to 87 per cent in 2015 and 82 per cent in 2021.

These numbers are not accurate. The rise in employment has helped to offset stagnant productivity, and increased incomes for the poor. This is not likely to be as beneficial in the future. Productivity will be an even greater factor in prosperity.

Line chart of Median equivalised disposable income, before housing costs (€ 000s) showing UK incomes have fallen behind those of European peers

Some people will argue that income stagnation doesn’t matter very much. They argue that policymakers should instead focus on wellbeing. The World Wellbeing Report demonstrates that there are many good reasons for governments spending on mental health and wellbeing in schools, social services, and climate change. Movement recommends. However, such spending will only be possible if there is a widespread increase in prosperity. Indeed, the rise of populist politics itself seems a natural, albeit disastrous, outcome of the UK’s high inequality and stagnant real incomes. “Let them eat Brexit” is the ploy. It may have looked tempting. But it wasn’t. will prove to be very indigestible The longer-term.

The main question in UK economy policy is how to end stagnation. The answer is not in the title tax cutsCompared to our European counterparts, taxes in the UK are already lower. It will not be deregulation. The UK economy is relatively unregulated, with the exception of the use land. It will require higher investment, as well as bringing in lagging regions and firms to the frontier. It will require improvements in corporate governance, capital markets, and other factors that encourage innovation and investment. To accelerate growth and reduce emissions, it will be dependent on the energy revolution.

Candidates for the highest office need to offer real answers to these huge challenges. They must be credible in their answers, despite Brexit’s limitations. Will they be able to do this? I doubt it.

martin.wolf@ft.com

Follow Martin Wolf myFTGet more Twitter



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