Intro
I thought my next post should be a general overview of the UK, with some reasons why we are struggling badly from an economic point of view, and an overview about what we should do going forward. To stop this blog turning into a book I have chosen to focus mostly on domestic economic policy in this section, which will lead to many blindspots.
It’s no secret that the UK has had a horrendous economic run since the financial crash in 2008, with GDP per capita stagnant for 20 years. To some extent, this is because the preceding 5 years or so pre-crisis had unsustainable growth, but even allowing for this the economy has been catastrophic since then. Couple this with inflationary shocks and massive cultural changes and it’s unsurprising to see the British public deeply disillusioned. Nothing seems to work, and there are no groups that benefit enough to justify the current regime. The Conservative Party seems finished and Labour are doing their best to follow them. The next most likely parties are to varying extents delusional about the problems the UK faces, which is extremely worrying.
Overview
The UK has forgotten how to be a rich nation and has taken its inheritance for granted.
Since 2000, the UK has faced 5 huge shifts. Firstly, China joined the WTO in 2001. In 2005, the UK was no longer an energy exporter. In 2008, the financial crisis led to the end of the “business model” of the UK. In 2016, the UK voted for Brexit against the majority of elite opinion. Finally, in 2020, we had COVID. In addition to this economic growth became dependent on immigration, in direct opposition to the British voters’ preference. I’d argue that this was contained after 08 through asset price inflation, but once directly put to the voters (Brexit), it became untenable.
I’d like to focus on the 2nd and 3rd points in particular, as I think they show a lot of our political climate and dominant ideas, and how we have gone so wrong.
Since 2005, we have made a significant effort to reduce energy usage and become an energy importer. Industry has been decimated, even taking into account the service nature of the modern economy. We have made a virtue of being world leaders in decarbonisation, but the real costs we have faced are ignored. The key foundational elements of a modern economy are missing from the UK.
Since 2008, we have tried to pay for our welfare state by taxing the top 1% of earners, rather than serious reforms and changes to our post-WWII welfare state. As a result of this and other measures, we have severely compressed the range of outcomes for a mediocre result.
How did we get here
It’s dangerous to try and give a coherent narrative to the above, and we have to acknowledge how much of history is random and uncertain. With that in mind, I’m going to ignore that and suggest two vague strands that characterise the UK in this period.
In a nutshell, it’s the overwhelming priority of the British electorate on “fairness” and a refusal to embrace risk by our political class. Let’s quickly dive into the key events.
The first and most obvious one was the financial crisis. In popular memory, the banks took massive financial risks that blew themselves and the economy up. Understandably, politicians were compelled to act to prevent this from ever happening again and passed several acts, including the Financial Services Act 2013, which, as ever with the UK, “gold-plated” global standards.
The problem for the UK is that banks are the linchpins of the modern economy, with lending crucial. Being able to borrow relatively easily leads to risk-taking, which can lead to the financial crisis in the absolute worst-case scenario. It also leads to the formation of new companies, which have no credit history, but perhaps a future compelling product. In the USA, banks have mostly recovered their position, and corporate lending is also served by private credit firms, but in the UK (and Europe), this has been largely stifled by heavy regulation. The sensible fear of catastrophic risk metamorphosed into stopping risk altogether, and ironically led to the UK being much worse off than it could have been.
This unfortunately spread elsewhere in the economy, including areas like pensions, leading to nonsensical outcomes. I would seriously recommend that anyone reading this checks their pension, particularly if you are under 40, to ensure that you are being well served by the default plan’s long-term goal. In most cases, you will not be.
Again, it’s well-meaning legislation aiming to avoid risk, but it is ultimately negative for the UK. Areas such as the charge cap in 2015 (aiming to protect consumers from overpaying for pension management) led to pension providers refusing to invest in areas like private equity and infrastructure funds, due to the higher costs. The legislation around pensions basically means the number one priority for pension managers is to avoid losing money – sensible on the surface, but if you make that the overwhelming mandate, guess what? You don’t invest in anything risky! Hence very boring and underwhelming returns, and a key source of capital for venture firms/start-ups / etc, lost altogether. The government is trying to reverse this, but efforts are slow, and there is a real lack of urgency here.
We also consistently see an emphasis on fairness, particularly for the UK’s role in global history and economic footprint. A lot of this leads to a desire to be the global leader in righting the historic “wrongs” that we did, even if these wrongs included the Industrial Revolution, which led humans out of poverty.
Hence acts like the UK Climate Change Act of 2008, which later became a legally binding emission reduction target for the UK, that in no sense would take account of the global situation, the UK’s strategic interests (beyond a vague sense of softpower, ever the UK superpower, and being the leader of the green revolution, whatever that means). What made it even worse was the sheer legalistic nature of the act – there were carbon budgets, independent advice from a body that had no other mandate (unlike politicians), and the availability for legal challenges in court from interest groups uninterested in the downsides.
A much better approach would have been to ditch the legal framework behind this. Instead, we should have adopted something similar to what China (yes, I know) has been doing with its 5-year plans. Clear statements of intent, but crucially (for obvious reasons) not legally enforceable, and able to be amended if, say, circumstances required it.
Or even more obviously, let it be driven from “below” – if economics says solar power was the best idea for the grid, or wind, or whatever you fancy, by all means go for it, but to tie the UK to long-term commitments is the height of folly. The number one act of any future government should be to amend or remove this act and allow local experimentation – if solar power is the best for the grid, by all means, whack it in, but why on earth would you deprive yourself of existing gas and oil infrastructure?
We also need a hard examination of what this green revolution is for – the solar panels/wind turbines are produced by China (a geopolitical adversary), for European companies, for use by British consumers. Our energy costs are among the highest in the developed world. From a strategic point of view, it seems strange to deny ourselves the use of oil and gas fields in the North Sea, particularly given that Norway intends to continue exploiting them. In addition to this, we have come close to blackouts in January 2025, and have averted these by the skin of our teeth. We are more dependent on foreign imports than ever, with most of these recently coming from the United States, due to its emphasis on fracking and other sources of domestic production.
This has led to significant knock-on effects as we close down most of our industrial capacity. The obvious negative implications are for national security, particularly when our security guarantor has made it clear it is far less interested in defending us / Europe than it has ever been. We have also lost a significant number of skilled jobs as a result of this, up and down the value chain. We’ve also made it so consumers, either directly or through general taxation, are spending more on energy compared to competitors such as the United States, meaning less expenditure in the economy for other goods and services, which has also fed into our stagnation.
Part of the problem of increasing stagnation without a fundamental reassessment of our economy is ever more arcane means of dividing up the pie. For an example of this, see the noble intention behind the work provisions of the UK Equality Act in 2010, specifically, work rated as equivalent and work of equal value. To most economists, this is a pretty obvious problem – why should the government (or in this case, a judge) tell employers to pay individuals in different roles the same amount, when that is precisely what the market can solve for you? To me this seems like the perennial problem we have with the idea of poor nurses, bloody overpaid footballers – the inherent nobility of a certain kind of work with what a free market tells you it is worth. We need to amend or undo this part of the legislation entirely, and accept the inherent difference in work, even (and in fact especially) when it is not fair.
I’d also suggest that our lack of local experimentation has finally caught up with us, particularly with a centre that seems to have been noticeably poorer / distracted since austerity and Brexit in particular. The UK is extraordinarily centralised, with local taxes at around 5% of total taxes, compared to 45% in the USA and 20% in France. What this tells us is that local government here is basically pointless – very little room to try new areas and experiment. It also means it is hugely incumbent on the centre, i.e. the government of the day to be effective in administration. Austerity and Brexit have both put paid to that in resources and attention. I’m pleased to see the announcement from the Budget about local tourism taxation as a great step in the right direction, but we really need to loosen the Treasury’s grip on local projects. Let local regions and nations decide how they want to spend – if it’s on poor uses of capital, so be it. But I believe most will find better ways for their money than we have seen so far in the UK, based on our region’s performance relative to the rest of the world.
Where to go next
I would like to be honest here and accept trade-offs where possible. Firstly, the UK is a mid-sized country and economic power in the world of extremes – best to be a giant (USA, EU, China, India, etc), or a highly nimble city/state (UAE, Singapore, etc). We run the dual risk of being too small to impose our interests on the world, but large enough to be an attractive proposition to those seeking to impose their demands on us. Furthermore, we run the risk of being unable to swiftly adjust through our own legislation, or international legislation.
Given this, our fundamental guiding principle of a nation should be flexibility and allow maximum experimentation where possible in the areas that we can. So, in no particular order, here are my suggestions:
- Massively weaken the centre in key areas to enhance risk-taking: ideas such as net zero, equal pay provisions, and others need to be curtailed significantly. The centre should only form the lowest layer of regulation, rather than aim to legislate for all eventualities.
- As part of this, there needs to be a true empowerment of the regions/cities / etc. This includes major tax-raising capabilities (and spending crucially, including over healthcare and welfare), bringing us into line with other modern economies such as France, Germany, and the United States, and political power to match. No individual in Whitehall should be dictating to Manchester, Scotland, Cornwall, or London, even what the correct economic course is – let them decide for themselves. Accept that some regions will do much better and others will mess it up – that is the consequence of devolution.
- I think a pretty controversial area will be the minimum wage. UK policy since 1998 has been an incoherent mix of attempting to increase worker earnings by forcing the lowest salaries to rise, and yet an insistence on high levels of immigration into health care and social care to keep these costs down. Add that our taxation system that pretty much demands individuals stay between 50k to 100k, and you can see why stagnation has been happening. Let local regions decide for themselves if a minimum wage is appropriate, and if so, what level is required.
- No more national centres or significant curtailment of these: inevitably, these end up in London and naturally focus on London issues. Attempts to move these to other parts of the country are usually folly – let local regions build their own institutions and stay away from meddling with them.
- Massively strengthen the centre in other key areas, particularly around security:
- The UK of the 1990s is gone. We have seen significant demographic change in the country and examples of failures to integrate, particularly in areas of high deprivation – take Tower Hamlets, central Birmingham, and so on. With the recent summer riots and anti-Israel protests, we are seeing the limits of law and order without a gendarme / national guard. It is time for the UK to introduce this in-between security force between the police and the army, like we have in other countries. This force must only answer to the central government and have the power and ability to intervene on multiple fronts.
- Removing or significant reform to non-political areas and bring them back under democratic control:
- Non-political here being slightly incorrect, as obviously everything is political. But we need to seriously rethink areas such as statutory care, SEND, net zero, etc. We (like any other country) do our best to avoid facing up to costs and shoving these off in creative ways to show that actually, we don’t need to handle these! In particular, with statutory care and SEND costs, we mandate these as essential services from the centre, but offer absolutely no support or discretion to local authorities. Spoiler alert – local government on the verge of bankruptcy, unable to provide services for the majority of taxpayers, and increasingly vulnerable to insane short-term measures such as turning to Private Equity. Decide what we want here – if we are mandating obligations, then provide central (i.e. general taxation) funding to match, or remove the obligation and allow regions to decide for themselves (and accept an unequal outcome).
- Tackle the two biggest issues in the UK – use of land and the NHS:
- It is no coincidence that our highly dysfunctional land usage (nothing ever gets built) and our NHS are both products of the Attlee government, which believed in socialism. These were the byproducts of a different age and thinking and have consistently ignored the price mechanism at their height, and to our extreme cost. My preference here would be wholesale reform, but this seems unlikely. Instead, let regions decide for themselves how to go about land use and healthcare – at the very least, the incentives will be better aligned.
It’s been a longer blog than I had anticipated, and there’s been a great deal missed out. Hopefully, I can come back to addressing some of these latter points in other posts, especially around healthcare and land usage.
I’ve also added the links below for areas/articles that I found most useful.
Links:
Equal pay: https://substack.com/home/post/p-161661611
Local funding: https://substack.com/home/post/p-179025535
Energy and net zero: https://dieterhelm.co.uk/energy-climate/the-price-of-energy-and-the-system-costs-of-renewables/
Local power: https://tomforth.co.uk/whynorthenglandispoor/
Europe / UK finance: https://encompass-europe.com/comment/europes-crippling-risk-aversion
