Britain is doomed to be America’s sick relation

city of london

Many commentators argue that the UK is condemned to continuing economic decline. As things stand, they are right: if we carry on with the same policies, such a fate will be baked in. Worse, a subsequent debt crash could even turn slow decline into precipitous collapse.

But it needn’t be like that. Turning round a surprisingly small range of carefully targeted policies could transform the UK’s fortunes dramatically. Rather than our living standards falling further behind the US, we could start the process of catching up.

Last year, GDP per capita for the average Briton was £39,400; for the average American it was £64,700 – a gap of £25,300. If current trends don’t change, we estimate that the gap will grow in 20 years time to £38,100 in today’s money.

On Tuesday, the Growth Commission put forward a range of policy proposals in its Spring Budget Report that would boost the forecast UK GDP per capita in 20 years time by £14,800 and roughly halve the percentage gap with the US. These proposals were based on an analysis of the three biggest of the UK’s underlying economic problems and targeted at solving them.

The first problem is that public spending got out of control. Initially, chancellors resorted to borrowing, then to taxing. Between March 2021 (when Covid was largely over) and November 2023, the OBR’s estimates of public spending rose by a staggering £192bn.

Even taken as a share of GDP (and hence taking out inflation) the rise is over £80bn. The number of UK civil servants, likewise, has risen from 417,000 in 2016 to 529,000 in Q3 2023; the number of other UK public sector administrators has risen from 590,000 to 656,000 over the same period. The total number employed in UK public services has risen from 5.4 million at its lowest point in 2018 to 5.9 million in Q3 2023.

Hence frozen income tax allowances, the jump in the corporate tax rate from 19pc to 25pc, and higher NI contributions (though these have been partly reduced since).

Getting public spending under control by freezing budgets, probably for three years, would start to deal with this. The money saved can be used to bring down borrowing and also cut those taxes that do most damage to growth.

We have highlighted the “tourist tax” (where revenues would probably rise if it disappeared); the high marginal rates of effective income tax (when personal allowances and childcare allowances are phased out); the high marginal rate of tax (again, when child benefit is phased out), inheritance tax (which discourages 300,000 older people from working and contributes to the 1,400 millionaires who leave the country each year taking their money with them), and the 25pc rate of corporation tax.

Over time, funds made available if spending is brought under control should also be used to unfreeze tax allowances and bring the corporate tax rate down to 15pc. Getting taxes back down is critical to enhance incentives for people to work, be entrepreneurial, and for businesses to invest.

Next, we have a problem with getting people into employment. This is partly a welfare reform issue, with the ballooning numbers “on the sick”, and partly a tax issue (e.g. the proposed abolition of inheritance tax will make a difference to the numbers of working older people).

On top of that, we need to reform labour market regulations like restrictions on overtime, on hiring and on firing and to make the minimum wage a genuine social protection against exploitation, rather than a wage floor for an increasing proportion of employees, set so high that it destroys jobs.

Finally, we need to remove the regulatory sand that has been thrown into the engine of the economy. Planning needs to be reformed. Some of the problem is with Nimbys, though you can’t entirely blame people for opposing development when the Government refuses to provide the necessary infrastructure or services to support it.

Much more of the problem lies in the 3,240 pages of planning eco-legislation, much of it badly thought out. While some items of eco-legislation are statutorily mandated, there is no equivalent statutory requirement for development, making it hard for a planning inspector to come down in favour of development.

The cost of not reforming planning is, of course, much higher house prices than need be. And although a rise in house prices can provide a short term adrenaline rush to the economy, longer term it depresses growth.

The second cost is a lack of competitive businesses. Nearly 30 years ago the consultants McKinsey calculated that the hospitality and retail sector in the UK was 30pc less productive than it should be because of lack of competition resulting from the planning process – it is almost certainly worse now.

The third cost is expensive and late infrastructure. Our roads and power stations are crumbling; rail is uneconomic and will remain so until the rail unions are brought to heel, reservoirs are falling behind demand. We may yet have to resort to candlepower again.

Beyond that is trade openness – in the week before Christmas the Treasury sneaked out a proposal that the UK will effectively go back into the EU’s proposed ‘fortress Europe’ by copying its Carbon Border taxes. This would reduce living standards by pushing up prices.

We need better energy and infrastructure – our planning reforms will help here, but also budgets will need to be increased. We need better security which will mean more spending on defence.

And, certainly until planning is reformed, we need to control migration. Our studies show that although this increases GDP, because of the economic damage it currently does through raising house prices it reduces GDP per capita.

The likely rate of housebuilding in the near future is about 200,000. Because of indigenous demographic changes, to keep down upward pressure on house prices net migration probably needs to be held down to 150,000 a year.

If we do all these, we will be surprised how quickly the economy can be turned around, leaving a UK that is dynamic and successful, and getting both young and old back into work.

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