France has 12 high speed train lines, and is planning to build 4 more. Spain has even more. Yet the only high speed line the UK currently has leads out of the country. Our Prime Minister, without apparently consulting anyone, has cancelled the more useful part of our second high speed line to Manchester. As Tom McTague writes: “The man from Goldman Sachs looked at the books and made a decision — and we are all supposed to accept that this is how we are governed.”
In economic terms the UK is essentially a country of two halves: the South East with London at its centre, and the rest. Below is a crucial chart taken from this post by Tom Forth, showing productivity levels in Europe’s major cities.
Near the top is London with other capitals as you might expect, but in the middle we have the other major cities of France, Germany, Italy, Netherlands and Belgium. At the bottom are the UK’s major cities. As Forth shows in his blog, this regional divergence in the UK has steadily increased over the last two decades, but as some other European countries show this is far from inevitable.
If you want to know why the performance of the UK as a whole has declined over the last decade and a half compared to most other major economies, here is a place to start. It is a mistake to see ‘levelling-up’ as just a distributional issue. When most of the country isn’t working very well, it is not surprising that the country as a whole performs badly.
A big reason for this poor performance is poor connectivity. Not just connections to London, but also connections between cities and between the cities and surrounding areas. The point of HS2 was not to get from London to Manchester faster (a very London-centric point of view), but to create greater capacity for more local passenger trains and freight on the existing lines. The most useful part of the HS2 project was not London to Birmingham, but the additional legs from Birmingham, which are the lines that have been cut.
The excuse Sunak used for cancelling the Manchester leg of HS2 was that since the pandemic people were using trains less. Demand had shifted down he argues, perhaps because more people were working from home or using zoom for meetings. Yet what evidence is this based on? Here is the latest quarterly data for the total number of rail journeys in Great Britain.
It is true that in the first quarter of this year total journeys were still less than pre-pandemic, but the numbers have been steadily rising over the last few quarters. It is way too soon to declare that there has been a fundamental shift in rail usage.  The suspicion has to be that the real reason for taking that decision now is to ‘make room’ for tax cuts before the next election, where the space they are making room in is a stupid fiscal rule on top of unrealistic forecasts.
Evidence that this was a hasty short term decision to save money rather than any long term strategic plan comes from the raft of measures assembled to suggest that ‘every penny of the money saved’ will be spent on other transport projects for the north. The most embarrassing is that it included a commitment to establish a rail link that already exists, but there are plenty of other contenders for that top spot. That suspicion also comes from the spin: if No.10 says they are focused on the long term that means they are doing the opposite and are hoping the spin will cover that up. Put this together with his various measures to make it even more difficult for the UK to hit its net zero targets, and we have a Prime Minister personally taking decisions for the benefit of his own short term future and to the detriment of the UK in the longer term.
Cancelling HS2, and rolling back on net zero, are two vivid examples of a long term UK problem that has become acute since 2010. The government does not invest enough, and partly as a result the private sector does not invest enough. As this excellent report from the Resolution Foundation’s Felicia Odamtten & James Smith shows, public and private sector investment are complements; the former encourages the latter. This chart from the report shows that UK public investment is consistently below the international average, and that average includes many countries that have underinvested over the last two decades like Germany and the US.
Before the financial crisis the impact of this lack of public investment on UK economic growth was masked by other positive factors (e.g. EU membership and the single market). Pretty much everything the government has done since 2010 has made this situation worse. Under the Labour government net public investment (the chart plots gross not net) increased from 0.5% of GDP to 3.0% of GDP, but 2010 austerity involved a sharp cut back in public investment to 1.5% of GDP. It briefly returned to 3% of GDP in 2020, but is now declining and is expected to decline further.
You can see that lack of public investment pretty well everywhere you look. The impact of this on the economy is not just about infrastructure like roads and rail. We have an acute shortage of hospital beds, way below most other OECD countries in per capita terms, and less equipment like MRI machines than most other OECD countries. That leads to a less healthy population and therefore to a reduced and less productive workforce.
But as the Resolution report also points out, stability in decisions is also important. Building new infrastructure will encourage private investment once it’s built, but you would hope (given how long these things take to do) that the announcement of infrastructure plans would also encourage private investment (which also can take some time to create). If you keep changing plans, or overturn the expectations business has of what governments will do, you increase doubt and uncertainty which in turn discourages research and investment. Here lies one of this government’s biggest failures, and it began in 2010.
Recessions happen, but the UK experience of the postwar period is that governments would do what they could to generate strong recoveries from recessions as quickly as possible. In the UK in particular, it is remarkable how quickly growth returned to its long term trend after each economic downturn, and a major reason for that was Keynesian countercyclical policy (monetary or fiscal). That gave business the confidence to plan ahead and invest.
Cameron/Osborne changed all that. With austerity they did the opposite (with monetary policy largely out of action), and so the recession led to a shift downward in GDP. There was no recovery for three years, and it was tepid when it came. From that point on every business knew that their plans had to allow for future recessions which might also lead to permanent shifts down in UK output.
The next rug to be pulled out from the legs of businesses operating in the UK was of course Brexit. Not only was any business importing or exporting from or to the EU hit by making it more difficult to trade, but the UK also lost its attractiveness for any potential foreign direct investment looking to access the Single Market. Ending free movement meant that inflation in the UK following the pandemic was worse than elsewhere, requiring tougher measures from the Bank Of England.
But through all this, the government kept its commitment to net zero, and to HS2. Businesses producing greener products (from energy to cars) knew that there would be an expanding market coming soon for their products. They could base their business beyond the South East of England, knowing better communications were on their way. Now, with a stroke of Spreadsheet Sunak’s pen, this rug has been pulled away too.
Measuring the impact of policy uncertainty on UK investment and R&D is not easy, but recently some studies have attempted to do that.  They confirm that greater policy uncertainty reduces both innovation and investment, and that policy uncertainty has on average been significantly higher over the last decade and a half than during the previous decade. Sunak’s decision to end the commitments to HS2 and net zero in an effort to obtain some political gain just continues a pattern we have seen since the Conservatives took charge of economic policy thirteen years ago. Uncertainty generated by this government’s economic policy changes are an important factor behind the UK’s relative economic decline over the last fifteen years, and Rishi Sunak’s administration has turned out to be as bad as his predecessors in this respect.
 The number of passenger miles travelled has been flat over the last four quarters, but that is still far too flimsy a foundation for such a major decision.
 The seminal study is Baker, Bloom and Davis (2016), QJE 2016. Their Economic Policy Uncertainty index (a more recent version is here) shows uncertainty stepping up around the Global Financial Crisis period, and staying higher subsequently.