Economy

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

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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.

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