LSE: Britain Urged to Adopt New Economic Strategy to Overcome Stagnation and Close £8,300 Living Standards Gap with Peers

Britain’s toxic combination of low growth and high inequality has left it falling behind its peers. But a new economic strategy that builds on Britain’s strengths as a services superpower, prioritises public and private investment, expands its great cities, and ensures good work in every town could help the country catch-up and close its £8,300 living standards gap with similar countries including France and Germany, according to a major new book published today.

Ending Stagnation – the final report of The Economy 2030 Inquiry, a collaboration between the Resolution Foundation and the Centre for Economic Performance at LSE, funded by the Nuffield Foundation – says the UK has now seen 15 years of relative decline, with productivity growth at half the rate seen across other advanced economies. Wages have flatlined as a result, costing the average worker £10,700 a year in lost pay growth. Nine million younger workers have never worked in an economy with sustained average wage rises.

Britain’s slow growth, together with its high inequality (the highest of any large European economy), has proved a toxic combination for low-and-middle income Britain. Poor households in Britain are now £4,300 worse-off than their French and German counterparts, leaving them struggling to cope when the cost-of-living crisis struck.

Ending Stagnation says that existing agendas for reversing decline are not serious, believing that ‘world beating’ rhetoric automatically translates into a ‘world beating’ reality, or that there is a path to turning Britain into a German style manufacturing powerhouse.

The report adds that while the challenges Britain faces are huge, they are not insurmountable. It sets out a comprehensive, hard-headed agenda for turning Britain from a stagnation nation to an investment nation. The proposed new economic strategy includes:

• A services superpower: Britain must build on its strengths as the second biggest services exporter in the world, behind only the US. A new trade strategy should recognise that global trade in the services Britain specialises in is growing twice as fast as goods trade since 2005, while also protecting the place of its high value manufacturing in European supply chains.
• Our second cities are too big to fail: While big cities should be centres for Britain’s thriving service industries, those outside London have productivity levels below the national average. Birmingham and Greater Manchester require huge investment in their public transport networks and housing if they are to attract advanced firms and skilled workers. With 69 per cent of the UK population living in cities and their hinterlands, millions would benefit.
• Investing in our future, not living off our past: Over the past four decades the UK has had the lowest investment in the G7. Tackling this legacy, alongside the net zero transition, requires public investment to rise to three per cent of GDP – and stay there. More pressure on firms’ management to invest for the long term should come from a major programme of pension fund consolidation, meaning far larger and more active owners of UK plc, together with putting workers on boards.
• Embracing and steering change: Economic change has slowed down, not sped up as many assume, holding back growth and harming workers’ prospects. Good firms should be able to grow, and bad firms allowed to shrink, through more competitive pressure. Tax advantages should be focused on young rather than small firms, and more workers empowered to take risks, with higher unemployment insurance.

A new economic strategy must be as serious about reducing inequality as it is about boosting growth, and include:

• Good work in every town. The success of the minimum wage should be built on with further rises. But falling job satisfaction and widespread insecurity make clear that a good work agenda cannot be a one-trick pony. Higher minimum standards are needed for notice on shifts (half of shift workers get less than a week’s notice) and Statutory Sick Pay (which can leave the ill on just £44 a week). In addition, new sectoral agreements to raise standards should start with the 1.7 million social care workforce.
• Rising prosperity for everyone: Benefit levels have not kept pace with prices, with cuts since 2010 reducing the incomes of poorer households by almost £3,000 a year. Shared prosperity means working age and pensioner benefits rising with wages in future.
• Better, not just higher, taxes: The tax take is on course to hit an 80-year high by the end of the decade. This rising tax burden should not just fall on earnings, but should be shouldered by other sources of income and wealth (which has risen from three to over seven times national income since the 1980s).

A new strategy needs solid foundations and honesty about the trade-offs involved. Higher growth and higher taxes are needed to raise investment, rescue public services, and repair public finances. Increased investment should be funded by higher savings at home, not borrowing from abroad.

With stagnation having persisted for so long, the book warns of fatalism about Britain’s economic prospects. But Ending Stagnation shows that Britain has huge catch-up potential. Were Britain to close the average income and inequality gap to its peers of Australia, Canada, France, Germany and the Netherlands, the typical household would be 25 per cent (£8,300) better off, with income gains of 37 per cent for the poorest households.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“Britain has huge strengths, but is in relative decline. A year or two of low investment and flatlining wages is survivable, but 15 years of stagnation is a disaster. Combined with high inequality, our slow growth has proved toxic for low- and middle-income families, who are now far poorer than their peers in similar economies like Germany and France. Their living standards were under strain well before the cost-of-living crisis struck.

“The task facing the UK is to urgently embark on a new path. A new economic strategy built, not on nostalgia or wishful thinking, but our actual strengths. Along with honesty about the scale of change needed, and the trade-offs involved. It’s time for Britain to start investing in our future, rather than living off our past.

“There no excuse for fatalism. Having fallen so far behind, we now have a huge advantage: catch-up potential. Closing the gap with peers like Australia, France and Germany would deliver huge living standards gains, with typical households over £8,000 better off. That is a huge prize for a Britain that embraces a new economic strategy and is, in many ways, more normal.”

Stephen Machin, Professor of Economics at the London School of Economics and Director of the Centre for Economic Performance, said:

“For decades, the UK has felt the effects of high inequality, hindered growth and economic stagnation. But this can change – the Economy 2030 Inquiry has been a path-breaking research venture that has produced robust and credible evidence, leading to a policy structure that can improve outcomes. The legacy of the inquiry needs to be a UK economy that delivers growth, and better, less unequal, standards of living in the rest of the decade and beyond.”

Alex Beer, Head of Portfolio Development at the Nuffield Foundation, said:

“Brexit, Covid-19 and the cost-of-living crisis have tested an economy already under strain, with slow growth and high inequality stymying improvements to the living standards of low-to-middle income Britain.

“Ending Stagnation delivers a clear and coherent vision for a long-term economic strategy, with people and places at its heart. It highlights the importance of a sustained investment in skills, of good jobs and labour market regulation and a social security system that doesn’t let people fall even further behind. It provides the keys that could unlock the huge potential of Britain’s second cities. And ultimately, a route to shared prosperity for the UK.”