What’s wrong with the United Kingdom’s economy?

Since the 2008/9 global financial crisis, the UK has had the blues. This was compounded by its self-destructive decision, “Brexit”, to decouple from its major trading partner, the European Union.

Prime Minister Boris Johnson’s shambolic management of COVID-19 only added to the country’s woes. And a revolving door of prime ministers, including the chaotic Elizabeth Truss, made the traditionally pragmatic “Old Blighty” seem more like Italy.

Recent months have sent a spate of reports calling for change. The UK needs a new economic strategy to end stagnation, cries one, while another announced that chronic under-investment has led to a productivity slowdown in the UK.

Many believe that the decline of the UK and the West represents the zeitgeist of our times. But what is really happening? At a time when many are debating the rise and fall of great powers, it is useful to go back and understand the ups and downs of UK economic history.

The United Kingdom led world industrial and economic development

It is easy to forget that the UK gave birth to the Industrial Revolution of the late 18th century, which boosted productivity growth and changed the world forever. Prior to this, the economic history of the world was one of unrelenting stagnation, as Duncan Weldon recounts in his long economic history of the UK.

The UK led the way and became the world’s most dynamic and powerful economy. This enabled it to expand its empire ahead of other Western countries. However, the Industrial Revolution also spread to countries like Germany, France, and the US in the second half of the 19th century. First movers can have difficulty staying ahead.

Nevertheless, during the decades before World War 1, the UK still sat at the centre of an early period of globalisation, with large movements of goods, services, capital, and people across its borders.

Just prior to World War 1, the UK fulfilled today’s economic roles of China, the US, and Saudi Arabia. Its share of global manufacturing exports was above 20 percent, more than China today. The City of London was the centre of the global financial system. The UK was also the world’s second-largest producer of energy, in the form of coal, and the world’s largest net exporter of energy. Following the War, globalisation went into reverse gear, and the UK did not recover this rate of globalisation until the early 1980s.

The pivotal role of the World Wars

The UK, and indeed much of Europe, was on top of the world on the eve of World War 1. But the war ultimately proved to be the key decisive break point in the UK’s golden era. It was thought that this war would last just a few months. In the end, the War lasted over four years, and the UK was tragically dragged into it.

The UK economy would never be the same again after the War. It went from being an important global creditor to a debtor. There was a huge expansion in the state, as government spending leaped from under 10 percent of GDP to over 40 percent and never went back below 20 percent. The UK, as the arch-globalist economy, then suffered during the 1920s and 30s as the world moved onto a protectionist and deglobalisation phase.

World War 2 was another massive shock. After the War, the UK was no longer a great power, a role that the US (and the USSR) then assumed. The UK rapidly lost most of its colonies.

Surprisingly, Clement Attlee’s Labor Party defeated Winston Churchill’s Conservatives in the 1945 elections. And Attlee’s government, from 1945 to 1951, launched a new orientation for the UK economy as it nationalised major industries and public utilities, created the National Health Service, and enlarged and improved social services and the public sector.

Overall, post-1945 saw a shift towards a more collectivist, social-democratic Britain, with trade unions playing a much stronger role. The UK economy rebounded strongly following the War, but Germany and France outstripped its economic growth. At the same time, the City of London remained unreformed and still operated as a liberal market economy.

From Thatcher to the present

Under the leadership of Margaret Thatcher, the 1980s saw a counterrevolution, as industries were privatised, government intervention reduced, and trade union power was decisively broken. But the shift was not as dramatic as it sometimes appears. The state remained large, and health expenditure exceeded defence spending for the first time. In the 1980s and 90s, Britain closed the productivity gap with Europe, but mainly thanks to being part of the European Union’s “Single Market”

After leading the Industrial Revolution, Britain would also lead the West in deindustrialization. A great reliance on the financial sector developed. This meant that Britain’s economy was highly vulnerable to financial shocks when the 2008/9 Global Financial Crisis struck. And then followed Brexit, Covid-19, and the wars in Ukraine and Gaza.

This led to the current bout of pessimism. But are things really so bad in the UK? In reality, the UK has many economic strengths.

UK’s basic economic strengths

First, Britain’s GDP per capita ($US 46,125) may be well below that of the US ($US 76,330) and to a lesser extent Canada ($US 54,918). But it compares quite favourably with Japan ($US 33,824) and other European members of the G7 – Germany ($US 48,718); France ($US 40,886) and Italy ($US 34,776). It is also way ahead of China ($US 12,720).

Second, the UK is the second largest services exporter in the world, behind only the US, especially for financial, travel and transport, telecommunications, and information technology services.

Third, according to the World Intellectual Property Organisation, the UK would have the fourth most innovative economy in the world, after Switzerland, Sweden and the US, and ahead of Germany (8th), France (11th), China (12th), Japan (13th), Canada (15th), Australia (24th) and Italy (26th).

Fourth, the UK compares well with other countries in the OECD’s Programme for International Student Assessment (PISA), which assesses the knowledge and skills of 15-year-old students in mathematics, reading, and science. Although average 2022 results were down compared to 2018 in mathematics and reading, and about the same as in 2018 in science, students in the UK scored higher than the OECD average in mathematics, reading, and science. Oxford is also the world’s top university according to Times Higher Education, with Cambridge and Imperial College London also ranked in the world’s top ten universities.

The plight of UK inequality

The one major downside to the UK is inequality. Income inequality is the second highest among the OECD’s advanced economies, after the US, with wealth inequality being even more pronounced. The UK would also be one of the most spatially unequal and over-centralised countries among the 38 members of the OECD. Regional inequalities became increasingly entrenched after deindustrialisation in the 1980s and following the 2008/9 global financial crisis.

London and the metropolitan parts of the South-East are doing considerably better than much of the rest of the country. The region keeps powering ahead regarding wage growth and productivity levels. This has led Duncan Weldon to argue that today, the economy of the UK is basically like that of Portugal in terms of GDP per head and productivity levels, but with an advanced Singaporean-style region around London in the southeast of the country.

In other words, the old kingdom is not so united! Of course, much the same thing could be said of the US today, with its fractured society of haves and have-nots. Ironically, while the north of England and the midlands gave us the Industrial Revolution, today they are backward regions of the UK.

Looking ahead

Inequality is fracturing the UK economy and society, and as many have argued, contributed to the disenchantment that drove the Brexit vote. Addressing inequality would not only improve a sense of social justice but would also strengthen the overall economy. If the “Portuguese part” of the UK were made a land of opportunity, rather than an area of disenfranchised communities, the whole country would be richer.

Greater national prosperity is critical for many reasons. It would:

-- enable citizens to have better lives, especially the 14.4 million people currently living in poverty.

-- help offset the economic costs of Brexit.

-- provide resources to deal with the costs of an aging population, like retirement income and health care.

While the UK’s education system performs well, the country does face skill shortages, and there is a need to re- and upskill the existing workforce. And in this world of rising geopolitical challenges, the UK needs to maintain the effectiveness of its military – a senior US general has reportedly told the UK government that the British Army is no longer regarded as a top-level fighting force. And above all, greater national prosperity is one path toward improving public confidence and support for free and open economies and societies.

Conclusion

The UK’s moment of greatness began two and half centuries ago. But this does not mean that the UK must now become another fallen great power. With wise leadership that heals the fractures in the UK economy and society, Great Britain can become Great again, and the UK can become United. It is all a question of leadership, political leadership that governs on behalf of the whole country, not just the southeast, and that says farewell to the “tyranny of nostalgia” that can afflict former great powers.

Acknowledgements

This article by John West was first published by EconCurrents on January 28, 2024.