November 28, 2023 - 1:00pm
On Monday, Bank of England Governor Andrew Bailey bemoaned that the outlook for the British economy is the worst he’s ever seen. Similar to the recent forecasts from the Office of Budget Responsibility, the Bank’s own prognosis expects next-to-zero economic growth over the next couple of years.
Britain may be in bad shape, but it’s hardly alone. All Western countries are grappling with the challenge of trying to sustain a social contract that was created in a more economically dynamic time. When public pensions and health care were created, only about a twentieth of the population were retired, people didn’t live much past 70, and the great productivity boom of the postwar period lay ahead.
Fast forward to today and the very success of that welfare state in lengthening lives has meant that many people live decades beyond retirement — which gives them more time to develop the health ailments and vulnerabilities the health system must deal with. With a fifth of the population now retired, maintaining such a welfare state requires the remaining workforce to be more productive than ever.
Unfortunately, the productivity boom of the postwar period didn’t last. Productivity growth has been trending downwards for decades, and shows no sign of relenting. That means demand for government largesse is growing faster than the new supply of resources.
As a result, either governments raise taxes to cover these rising costs, raise economic growth, or cut spending elsewhere. The last one is not easy. What’s often said of the United States government — that it’s an insurance company with an army — is true of all Western governments: once you rope off the key elements of the social contract, like pensions and health care, then add in the minimal functions of government, like basic law and order, there’s not a great deal left to cut.
That’s why, even during the austerity of the Osborne years, Britain’s debt kept rising. But the country’s growth performance remained underwhelming, with the country’s GDP per capita actually declining since the financial crisis. In part that’s because you have to spend money to make money. As the US’s ongoing experiment with Bidenomics reveals, investment in infrastructure and research and development are often needed to create an environment attractive to private investors. Those countries that have instead chosen to prioritise fiscal prudence and allowed infrastructure to decay, like Britain and Germany, have delivered the most unimpressive economic performances.
To add to its woes, Britain has scored a number of own goals in the last few years. The stop-start policy-making of the last few years combined with instability in the government, has hardly encouraged businesses to ramp up investment. Meanwhile trade opportunities have lagged — the latest damp squib identified by the OBR being the country’s entry into the Trans-Pacific Partnership, which it expects will barely budge the country’s growth rate.
Unless the UK wants to engage in an American-style debt binge, it will have to choose whether to build the economy of the future or cling to the social contract of the past. Because at the moment, Britain appears to be eating into its future growth to support its present consumption.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeShhhh!
You’re only supposed to blame it on Brexit and 13 years of Tory rule.
If it’s happening elsewhere – particularly among our great and glorious former “EU Partners”- then it becomes difficult to maintain the approved narrative. And we can’t have that.
The EU remains an economic powerhouse and Bidenomics has been a fantastic success – anyone who disagrees with that is obviously a xenophobic, swivel-eyed economic illiterate.
Hey! I may be xenophobic, and I may be swivel-eyed, and I may be illiterate, but I am not…what was the other thing you called me?
Hippy?
The vast amount of money the world’s governments threw around during COVID can’t have helped.
Whatever about the EU it looks like Bidenomics is in fact doing pretty well. The US is growing fairly rapidly, and inflation is getting controll, so maybe you are number 3.
The present social contract between the Govt and the people is broken and unsustainable.
The State has been unable to keep to its side of the contract, particularly on health.
We need a new model, and there is only one option, the small state and low taxes, to rejuvenate our economy and the standard of living of the people.
You cannot rejuvenate a disillusioned, ageing country.
You yourself prove that by dusting down old Thatcher speeches from the 1980’s – proposing as the only option a politics and economics as dead as Reagan or the Baroness herself.
Thatcher didn’t invent the ‘small state low tax economy’ … nor did i mention her … it is the only option … perhaps you have a better one?
Unfortunately for people with priorities such as yourself, the state is going to be getting a much worse slashing than anything that ever happened under Thatcher and Reagan. The 1980s were actually periods of quite high borrowing and spending, the difference was not in the size of the State per se, but that supply-side reform was imposed. While the 30 years of Liberalism since then has partially unwound the gains of the 1980s, the problem we now face is fundamentally different: nothing except radical technological advances can possibly maintain a social contract in which almost everybody enjoys working age benefits, lives to 90 years old and still gets 25 years in retirement.
It’s worth pointing out that the advances of AI and robotics might well in fact deliver the solution to this – it’s not purely wishful thinking. But it isn’t a given by any means, and the reality is that state monoliths providing health, education and adult social care, employing hundreds of thousands of pensionable bureaucrats, is simply not even close to affordable. I suspect that the next government will give punitive taxation a go just for old times sake, but it’ll end the same way it always does.
I much prefer the position here in Australia, where although there is a “safety net” age pension, most retirement income is self funded through the superannuation system.
Of course you can. But not with that attitude.
So much of this is simply a question of having the sense to see what needs to be done and the determination to actually see that through.
The suggestion that older people cannot learn and adapt (and do not want to) may have had some truth in the past. But it won’t in future. We simply don’t have that luxury. We’ll live longer and effectively age more slowly. And we’ll need to work longer. Which means continuing to learn and adapt.
That solution isn’t going to work now is it Richard. The inability to meet the contract on health is not going to be improved by slashing taxes. The UK needs proper investment, by government or the private sector and given that truss was shunted out of office for suggesting lowered taxes it looks like the market agrees.
We need to remove the triple lock on pensions though.
You don’t get growth without cheap energy. Europe doesn’t have cheap energy because of net zero, and it’s leaders made that choice.
John Galt IS correct. No cheap national energy security. No commitment to wealth creation and enterprise. No control of mass immigration of non tax paying future burden millions. No control of Welfarism and Entitlement culture. No resistance to the anti growth Net Zero ideology. This is the death trap binding all the EU progressive states of the West.
The central paradox in the welfare state is the more successful it is, the less successful it is. In an ordinary business, like a lemonade stand, the more lemonade I sell, the more capital I have, which means I can afford to sell more lemonade. The consumers of the product are those who pay for it, so a virtuous cycle kicks in. With the welfare state, those who pay for the product are exclusively and explicitly those who don’t use it, which means that every new customer the welfare state gains is a loss of revenue. The more people it helps, the less well it can help them, until at last the system crashes out.
That’s a great way of looking at it, not one I’d ever considered before.
Well then, they’d better start stepping up asylum approvals for all those hard working African refugees in a damn quick hurry!
Similar to the recent forecasts from the Office of Budget Responsibility, the Bank’s own prognosis expects next-to-zero economic growth over the next couple of years.
I thought that was the policy, though. “Net Zero,” right?
When the author says investment in infrastructure, one pictures roads and railways and ports. Bidenomics is nothing of the sort. It’s a bunch of subsidies to favoured industries that will almost certainly fail and is currently feeding the inflation monster.
You’re trusting an OBR analysis?
Economic forecasting only exists to make Astrology seem like a credible science
There are lots of signs that the government is foreseeing much stormier weather than just zero-growth. Managing the economy has the sense of workmen trying to walk a large plate-glass window across the M25 at rush hour – there is a lot of fragility out there – and not just in the UK.
I think one of the problems to growth is over-regulation of everything Many of the regulations are designed to support polices such as improving the environment, for example. However, polices require public officials to develop them , implement and monitor them. They often then require ‘experts’ to help business navigate them. I live in a private rented property, which has recently had to have the wiring system checked to comply the latest regulations. If I move out they will need to get a done again when the next tenant moves, and if they move again, etc etc, otherwise its every 5 years (it used to be 10 years, which makes sense as modern fuse boxes are meant to be checked every 10 years). Now, you might say that that’s a good thing as electrify accounts for around 20,000 fire per year in the UK. However, 89% of those fire are caused by faulty products such as cookers, not the wiring. This increases costs and disturbance to the tenants (I had to take time off of work for it to be done) for no real benefit.
That’s an excellent point. Another “unforced error” where we have chosen low productivity for really no good reason.
The point about business investment is well made. We don’t know whether we’re on our arse or our elbow given the volatility in legislation and taxation. Also, as people retire so do businesses. We closed one during Covid and the second goes next year. I fully expect a crisis to bring yield curve and capital controls and for some form of wealth tax or proxy for it. Liabilities will also be attacked – means testing on pensions and further upward hikes on retirement age within 7 years and social credit style health regimes. Shame will be the new currency to force compliance.
Meanwhie we’re off to a 20% tax regime with no public debt. Same demographic issues but lower base should see us through. We saw the 70s (homework by candlelight) and don’t need to wait for the tribute act. Positively, to this point mankind has always come out the other side. We are an amazing species. My only reservation this time is that our rapture with technology appears to show our willingness to destroy the very best of what we can be into the ether of code. Larry Page losing Musk’s friendship back in 2007, having accused him of being specist, was a real tell and we appear to be falling in line behind the tech bros.
‘Meanwhile we’re off to a 20% tax regime with no public debt’. Do tell where!
A rock in the irish sea. We made a list of all the usual suspects (Malta, Gibralter, other crown dependencies), applied criteria and it fell on the shortlist. Started visiting and fell in love with the island and the people, who are incredibly welcoming with communities you can actively join. Whilst the tax/political regime is advantageous, I don’t believe the other pull factors are attractive enough for most (certainly not if you want chic restaurants and shopping malls). But if you have a love of the great outdoors (the whole island is UNESCO biosphere with dark skies status) and want some peace and quiet, highly recommended. Hope that helps Andrew.
Thank you Susan, it does! Not sure which rock you intend to inhabit, but it all sounds very enviable
This is largely nonsense.
Productivity growth hasn’t actually been “trending down for decades”. Perhaps if measured in total across an economy we are now choosing to prop up with a vast pool of imported cheap labour. But there is a clear bifurcation here – many parts of the economy are far more efficient and productive now whilst others lag. First group: anything that’s benefited from technology and the huge performance:cost gains from computing. Second group: areas which cannot/seem incapable of/wish not to adapt to these changes. Almost everything associated with government is in group 2.
Seriously, the author is claiming we are unable to exploit the massive advances in computing and technology to deliver productivity growth ? Computing which has offered “more for less” each year for 3 decades. We may have too many people too incompetent or reluctant to do so. But it’s an open goal.
No mention of reforming the welfar statee either here. Which is an obvious place to start looking for improvements. The question of whether the welfare state itself isn’t a dead weight holding back productivity is never raised … paying large numbers of people to do nothing hardly raises average productivity.
Far too early to judge whether this so-called “Bidenomics” will work. The subsidies have barely started so far. Anyone who thinks this sort of program is measurable over 2 years is a fool.
A very likely outcome will be a debt crisis in the USA (the interest costs alone are staggering} , and may well happen in a few other Western Govts as well. Makes me wonder where all the funds will come from for the “energy transition” given the trillions needed for new grids, etc. I think the average taxpayer is waking up to these issues as we see developments like WIlders in Holland, and Le Pen leading in France.
“Productivity growth has been trending downwards for decades”
There are probably many reasons for this, but chief among them are the use of low-wage immigrant labour and the artificial increases in the cost of energy.