The Anatomy and Reasons for UK relative Economic and Political decline over the last decade and a half

 

Nothing works anymore, the country is in a mess, worker’s living standards have remained stagnant, public services are at breaking point. Such statements are now commonplace, and are increasingly brought together in articles like this one by Sam Knight in the New Yorker. But is all this the result of 14 years of bad government, or can the blame be laid at the door of one or two specific events like austerity or Brexit?

Economic decline

I want to start with a post I wrote two years ago, where I was already talking about an unprecedented era of UK macroeconomic decline. I focused on comparisons with the US, and here is an updated chart of GDP per head in the two countries.

The divergence between the two countries has grown steadily since around 2010, it has become particularly dramatic since the pandemic. While real GDP per head in the UK has increased by only around 5% over the last 15 years, in the US it has increased by over 20%. As that earlier post showed, this divergence was not a feature of the previous three decades, but instead started around 2010. Between 1980 and 2010 UK GDP per head grew at least as fast as the US.

Comparisons with Europe are less dramatic, but partly for that reason may be more instructive.

If we compare the UK to the EU average (blue and green), the EU recovered more rapidly from the Global Financial Crisis (GFC) recession, but then fell back as the second Eurozone recession began to bite. However from 2016 onwards EU growth exceeded growth in the UK, leaving an 8% gap by 2023. A difference in growth of 8% over less than a decade is a lot. However over the last 15 years growth in France has been similar to the UK, and things have been worse in Italy (not shown above).

GDP per head does not tell the whole story about prosperity, because it doesn’t tell you about the purchasing power of incomes. Here is a comparison of real wage trends over roughly the same period from this source.

In this case the UK ends up well below France, with real wages in 2023 below 2008 levels. Part of the contrast between real wages and GDP per capita is distributional, with the UK government favouring pensioners in particular. However a large part is also about consumers buying many goods from abroad, and these becoming more expensive because sterling has depreciated. Here is the Sterling Euro rate over this period.

We had a large depreciation during the GFC, followed by a gradual appreciation until Brexit, when sterling depreciated again. A depreciation of 20% between 2007 and 2023 will reduce the purchasing power of UK nominal wages by a good few percent.

What does this tell us about why the UK has experienced a decade and a half of economic decline? These comparisons suggest austerity is important. The UK set out plans for large-scale and relentless austerity earlier than the EU, which is why our recovery was relatively slow, but the EU as a whole fell back to UK levels when it embarked on widespread austerity during the 2011-13 period. The US had an excellent recovery from the pandemic because, unlike the UK and Eurozone, it encouraged its recovery with fiscal expansion. As I argued here, deficit obsession, shared by the UK and EU but not (currently at least) by the US, appears to be bad for growth not just in the short term, but continuing into the medium term as well. Evidence also suggests cutting spending in a recession actually increases the debt to GDP ratio.

Brexit also clearly matters. I doubt that it accounts for all of the GDP per head gap that has opened up between the EU as a whole and the UK since 2016, but it almost certainly accounts for a good part. It is also responsible for the 2016 depreciation which reduced the purchasing power of UK incomes. [1]

To conclude, the relative decline of the UK economy since around 2010 is very real and substantial. It is not unique or the worst performance among major European economies thanks to Italy, although it is worth noting that in contrast to the UK Italian growth has been strong since the pandemic. Both austerity and Brexit have played a large part in producing the UK’s relative decline, but other factors (e,g, bad governance generally, poor pandemic management, encouragement of rent seeking from government) may also have played a part. As the New Yorker article notes, austerity itself probably played a key part in ensuring Brexit happened.

Political decline

Of course the current feeling that nothing works anymore isn’t just about a significant relative decline in living standards. It is also about political failure. There is no doubt that this became acute following Brexit. As I have noted many times, support for Brexit sorted those interested in evidence or even common sense from those who were not: some of the former got expelled from the party by Johnson and the latter got to be in his cabinet.

But 2010 austerity was also a failure of evidence based governance, in two crucial respects. First, we had known since WWII that cutting government spending during a recession, where interest rates were stuck at a lower bound, was a crazy idea. The fact that this was also advocated by the Republican party in the US, and a Germany dominated Europe spooked by the Eurozone crisis, should not lend it any respectability. 

Second, substantially shrinking the state without significantly altering thetasks the state is required to perform only makes sense if you believe that there are massive efficiency gains to be had, and again there was plenty of evidence in 2010 that this was untrue. The dire state of most public services today, which is so central to the current national feeling of despair, stems from this fundamental error that began in 2010.

I think it is important to recognise that so much of our current political malaise has deep roots of Conservative party strategy since the fall of the Major government, rather than being something that just happened with Brexit. The contrast with Labour in opposition is instructive. Whatever you might think of Labour’s embrace of some aspects of neoliberalism, it showed a party adapting to electoral failure. Where the subsequent Labour government did differ from Thatcher was in increasing spending on public services and particularly the NHS, and this was clearly popular with most of the public.

The Conservative opposition from 1997 to 2010 took none of this on board. Instead they saw themselves as leaving off where Thatcherism had ended, in an ideological rather than evidence based way. She had ignored the economists when raising taxes in the 1981 recession, so they would go further with austerity, not bothering to note that her fiscal contraction during a recession lasted for only one year and was then reversed. She had shrunk the state so they would do the same, but they ignored the fact that Thatcher mainly reduced what the state did through privatisation rather than starving it of money. Whereas some of Thatcher/Major’s economic policies were popular, those of their successors were not.

In simple terms the Conservatives in opposition moved further to the right on economic policy, rather than shifting left on public spending in a way that Blair/Brown had shown was popular. They understood that good public services were popular, but used the GFC as an excuse to cut spending. Conservative MPs today are much more right wing on economic issues than Conservative voters or members. [2]

Sunak’s strategy of focusing on tax cuts and culture war issues, that today seems so out of touch with the concerns of most voters, also stems from Conservative strategy after 1997. Of course Conservative party members have always been socially conservative, but Thatcher argued for her economic policies on their own terms. In opposition the Conservatives, like the Republicans in the US, saw their culture war as a means of winning despite their economic policies. With the help of the party in the media, they focused on immigration as a means of winning support from voters who were socially conservative but left leaning in economic terms, a strategy that was most successful with Brexit and Johnson’s victory in 2019, but which is now seen by many as the sham it always was.

One other feature of politics that we associate with Brexit and Johnson particularly, and which persists today, may also have its origins in the Conservative’s period in opposition from 1997 to 2010. One notable feature of the attitudes of the average Conservative MP (at least in 2020) is that they are slightly more socially liberal than the average voter, and therefore much more liberal than Tory party members. For most of these MPs the focus on social conservatism and culture wars has to represent a degree of deceit to win power rather than an expression of underlying beliefs or values.

For this reason, the tendency to deceive and lie to gain or retain political power, which reached its summit with the Brexit campaign and which continues today on issues like dealing with refugees, may represent the continuation of a trend that began in those opposition years. We don’t know how much of Cameron and Osborne’s rhetoric of deficit reduction they actually believed, but we do know that they started cutting taxes fairly quickly after 2010, which you wouldn’t do if deficit reduction was really your primary goal.

For these reasons I see the political decline of the last fourteen years as deeply rooted in the way the Conservative party developed since the Thatcher and Major years. One of the reasons for the current feeling of political despair is that the Conservatives under Sunak have almost stopped governing, and instead almost everything the government does seems aimed at trying to rescue some votes.

For completeness I would add two final, more minor, points. The first is that part of the current malaise also comes from an uninspiring opposition, but much of that stems from a First Past The Post electoral system where government typically alternates between the two major parties, and past Labour defeats. In most circumstances, including those today, it makes electoral sense for the opposition to appear ever so slightly more to the left in economic and social terms than the government. Labour too are in the business of winning votes, and in addition are inevitably very cautious of doing anything to lose them.

The second point that needs to be made is that the political decline over the last fourteen years in some part reflects a decline in the quality of our mainstream media. Some of this is obvious, such as the right wing press becoming a propaganda vehicle for Brexit, or the influence the Conservative party has had on the BBC. But it is also the case that the broadcast media, and particularly the BBC, has an increasing obsession with balance at the expense of informing viewers about facts or about the consensus of expert opinion. This has been an important factor in facilitating our political decline. It played a crucial part in the 2015 election, in the Brexit referendum and in the election of Johnson and it continues today. [3] More generally it allows particular members of the elite to present themselves as outsiders, championing ordinary people, and allows political deception and lying as a matter of routine.

When the Conservative led Coalition came to power in 2010, it suggested that cutting public spending rather than improving living standards should become the government’s economic priority. Today we are experiencing the inevitable result, a combination of dire public services and fourteen years of relative economic decline. In an attempt to appeal to voters that wanted functioning public services, they pretended immigration was a major problem. As a result we ended up with Brexit, trying to traffic asylum seekers to Rwanda and a government moving further to the right on social as well as economic issues. Today’s economic and political malaise is a direct consequence of a Conservative party strategy that was conceived after 1997 and implemented from 2010.

[1] The depreciation from 2008 to 2010 is generally put down to the fact that the GFC affected the UK more than most, because our banking sector was relatively large. However, having worked on equilibrium exchange rates, I have always found that justification for such a large depreciation unconvincing. In this respect it is also interesting that once the UK started growing again but the EU did not, sterling began appreciating, such that by 2015 it had regained most of the ground it lost during the GFC.

[2] The fact that taxes have increased as a share of GDP over their time in government is because spending on health has been rising as a share of GDP almost everywhere.

[3] On the few occasions the broadcast media ignored impartiality and took a clear side it backed the wrong cause, including its adoption of deficit obsession after 2010 and relentless pursuit of antisemitism within Labour while largely ignoring Tory Islamophobia and Johnson’s unsuitability to be PM. The latter, together with sections of the Labour right who preferred Johnson to Corbyn, helped ensure Brexit happened and led to many thousands of deaths in the subsequent pandemic.