How to fix the UK? Let me count the ways

Here’s the bad news: it is going to take more than a change of government to cure what ails Britain. The symptoms are wearyingly familiar, but worth summarising. Waiting lists for NHS treatment have soared above 7.5mn, from 4.2mn in 2019 and 2.5mn in 2010. Prisons are at capacity, and the court system long since exceeded it. Local government funding has been squeezed for years, with obvious effects on local services such as social care, libraries and leisure centres.

The obvious explanation for all this is that 14 years of Conservative-led governments have cut taxes, preferring to trust citizens with their own money even if it leaves the public realm looking threadbare. But that’s not what has happened.

While headline taxes on average earners are indeed low, as a proportion of national income the total tax burden is — infamously — near the highest level since the 1940s, while the UK continues to borrow and add to the largest pile of debt in living memory. In short, we are spending more than ever and somehow getting less than ever for it. Those are the symptoms.

The cause is familiar, too: productivity has stagnated since 2008. Productivity is the value that an average worker produces in an hour of work. Productivity means getting more for less, and for decades, we were able to expect that living standards — both in terms of the public services we enjoy and in terms of the money we ourselves are able to spend — would gradually improve.

The past 16 years have been different. “Real wages are roughly at the same level as they were in 2007,” say Anna Valero and John Van Reenen of the LSE’s Centre for Economic Performance.

Why has productivity been so dismal? There are several culprits, some easier to fix than others. The UK’s finance-heavy economy suffered from the 2008 financial crisis. Regional in­equality is high, and this isn’t just a story about “left-behind” towns, but cities such as Greater Manchester and Birmingham not reaching the potential suggested by Europe’s great secondary cities such as Barcelona, Frankfurt and Toulouse.

The education system offers little to young people who aren’t on track to get a high-quality degree. The decades-long reluctance to build enough houses means that our homes are ageing, cramped, poorly insulated and excruciatingly expensive, but it also damages productivity. That is because it is prohibitively costly to take one of the simplest and most basic steps in search of a better life, which is to move to a place with a more dynamic economy than the place you grew up.

Finally, there are the decades of under-investment, which is even more striking in the private sector than the public sector, but which bites in both. “Virtually all of the productivity gap with France is explained by French workers having more capital to work with,” the Resolution Foundation declared in last year’s epic “Ending Stagnation” report.

Investment means taking a long-term view, sacrificing consumption now in search of higher living standards tomorrow. The UK has preferred “jam today” for 40 years, and we are now suffering the consequences.

So what to do? Two policy gambles have failed. The first, Brexit, knocked business investment flat on its back and complicated all sorts of trade and travel that was once simple. The independent Office for Budget Responsibility estimates that Brexit is on course to knock 4 per cent off the UK’s economic potential over the next few years.

The second, Liz Truss’s attempt to kick-start growth with an unfunded tax cut, fell flat within days. Having correctly diagnosed the disease, she almost certainly prescribed the wrong cure. We’ll never know for sure, because her bedside manner was so clumsy that the patient rebelled. The best thing one can say about Truss’s shortlived premiership is that her policies were much easier to reverse than Brexit.

To list the problems with the British economy is to see the difficulties of fixing them, but there is some hope. Long-promised planning reform could unlock an enormous increase in investment, productivity and most importantly the affordability of everyday life. One simple but radical idea, proposed by the Centre for Cities, is a presumption in favour of development on greenbelt within half a mile of existing commuter stations, while protecting sensitive land. Less than 2 per cent of the greenbelt would be affected but more than 2mn sustainable homes built.

Tiptoeing closer to the EU customs union and the single market would be a useful first step towards eventually undoing the damage of Brexit. The tax system remains full of loopholes and absurdities. More logical, efficient taxes would raise more money while causing less economic damage.

And with luck, one serious drag on the UK economy will be lifted with a new government: we might reasonably expect less uncertainty. No doubt there will be shocks ahead, but with luck they will not be worse than Brexit, Trump, Covid-19, war in Ukraine and a revolving door of prime ministers, each with their own idiosyncratic vision of what must be done. With less uncertainty we can certainly hope for more business investment.

The next government faces a huge challenge. Simply steadying the ship would be a start.

‘Skint: the Truth About Britain’s Broken Economy with Tim Harford’ airs on Channel 4 on July 1 at 9pm

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