The UK economy has been falling further behind its former peers
but could be on the brink of a turnaround, emphasising the need
for the Government to ramp up rather than run-down its economic
growth strategy, according to major new Resolution Foundation
research published today (Monday).
As the Chancellor joins other heads of state at Davos, the report
Mountain Climbing takes stock of the UK economy and
the scale of the challenge it faces.
The authors warn that the UK's poor post-financial crisis
economic performance has continued well into the 2020s. Its GDP
per head is now level with Italy, having been 8 per cent higher
back before the pandemic. And having closed the gap with the
average of Australia, Canada, France, Germany and the Netherlands
to just 5 per cent in 2005, the UK is now languishing 15 per cent
behind its former peers.
There are signs that the UK economy may be turning a corner
however, with (accurately measured) productivity growing by
3.4 per cent over the past 18 months (Q1 2024-Q3 2025) –
more than the previous seven years combined. The Government's
next steps could help to determine whether this really is a
turning point for the UK economy, or another false dawn for
stronger growth.
The report says the Government's three-pronged strategy of
restoring stability, increasing investment and reforming the
economy is the right one for the challenges Britain faces.
Progress has been made on all three, from new fiscal rules, to
powering up public institutions like the National Wealth Fund to
crowd-in private investment, to stabilising the country's
corporate tax regime. But the Government has spent much of the
past 18 months running down its own plans.
Despite pledging to restore stability, policy uncertainty has
been higher in this Parliament than any of the previous seven,
while the Chancellor has announced £6.1 billion of U-turns –
second only in scale to the reversal of the Truss-Kwarteng
‘mini-Budget' over the past 15 years.
Public investment has been put on firmer footing. But ramping up
capital spending on defence, while understandable in the current
environment, has crowded out spending on economic infrastructure
like transport and R&D, which is not set to rise as a share
of GDP across the Parliament.
The report identifies planning reform, trade and the labour
market as areas where the Government needs to be bolder.
Planning reforms have not yet led to more homes being built. This
is especially true in core cities and the capital, where housing
starts have fallen to a 30-year low. Ministers need to finalise
the National Planning Policy Framework, stabilise the Building
Safety Regulator without undermining safety, and establish
development corporations with the necessary financial firepower
to build new towns.
The biggest area for potential growth lies in trade, and in
particular reversing some of the damage from the Trade and
Cooperation Agreement with the EU. Pursuing deeper EU alignment,
by replicating the Northern Ireland customs arrangements across
the UK, could reverse around one-quarter of the economic damage
of Brexit, twice the India, US and EU-UK reset deals combined.
But as the Government has ruled out this strategy, a bolder Plan
B is needed. Future trade policy should be more focused on
services, reducing its high default tariff regime and actively
pursuing areas of regulatory alignment with the EU (in pharma and
chemicals) as well as divergence (in fintech and biotech).
Efforts to boost growth must also be employment-rich if they're
to lift living standards too. While the UK's employment rate
is above average compared to other rich countries, the
report calls on policy makers to address its two weaknesses –
lower employment for the under 25s and over 50s. This holds the
key to the UK reaching an 80 per cent employment rate.
While hard to achieve, the
economic prize for success in these three areas is huge. The
report finds that together they could boost annual growth in GDP
per head by 0.6 percentage points over the next decade –
increasing projected growth by more than half. Achieving this
would amount to a £2,000 boost to household incomes and allow the
NHS Budget to increase by a quarter.
Greg Thwaites, Research Director at the Resolution
Foundation, said:
“Twenty years ago, the UK economy was close to catching up with
Germany. But decades of stagnation mean that we've now been
caught by Italy and are miles behind our former peers. It's time
the UK started to catch up.
“There's lots to welcome in the Government's economic growth
strategy. But it has spent much of the past 18 months undermining
that strategy with policy U-turns, kite-flying tax ideas and
timidity in areas like trade where it needs to be bold.
“With signs that productivity may be turning a corner, the
Government must capitalise by ramping up its plans. It should
redouble efforts to unblock housebuilding in major cities, focus
job support for young and older workers, and decide whether to
bite the bullet and reverse some of the damage from Brexit.”
Notes to Editors
- Embargoed copies of Mountain Climbing by
Elliott Christensen, Nye Cominetti, Sophie Hale and Gregory
Thwaites are available from the press office.
- The report comes two years on from the publication of
Ending Stagnation by the Resolution Foundation and
Centre for Economics Performance at the LSE. Copies are available
here.
