Britain has been reduced to Trabant-status among the West
Let’s start with the unedifying facts. Real UK GDP per capita – that’s national output per head with inflation taken out – grew at 2.3pc per year from 1950 to 2008.
It made us nearly four times richer in 2008 than we were in 1950. It’s an incredible tribute to the power of technological advance, the rising amount of labour-saving capital in the economy, and the magic of competition and innovation in improving the way we do things.
However, according to the Office of National Statistics (ONS), since 2008 there has been virtually no improvement in our output (GDP) per head – a derisory 0.2pc per year.
Worse, there has actually been a fall in average wages when adjusted for inflation. So in Jan 2008, the average full-time salary was £22,300, which in today’s money (i.e. adjusted for CPI inflation) was £35,750; average salaries in October 2023 are £34,750 – that’s a fall of 2.8pc.
It’s much worse if we use RPI to adjust for inflation; a real-terms salary fall of 13.6pc. That’s 15 years of negative wage growth – the first time in over 200 years that this has happened.
This is the puzzle – why have we stopped growing? Some might say that continuous growth is not the general historical human experience, and they would be right.
From the birth of human civilisation’s recorded history – say around 5,000 years ago – until about 1700, there was, on average and taken in the round, little or no improvement in average output (and income) per head in the human population. People generally lived in what we would today call extreme poverty.
Then man discovered that harnessing newly acquired scientific, economic and political knowledge enabled this to change.
From around the mid-18th century, Britain, and then the world, embarked on a period of virtually continuous growth in output per capita and personal income.
In the UK this all stopped 15 years ago. I believe that there is one overarching reason for this pause – the rising interference of the state.
By this I don’t just mean the tax burden (although that doesn’t help); I don’t just mean the welfare state (although that doesn’t help either); rather I mean a deep interference in day-to-day decisions that ordinary people make in both a domestic and business setting.
Setting aside the growth-depressing employment of nearly 20pc of the workforce by the state, the remaining 80pc of the workforce is employed in the private and not-for-profit sectors, all of which are now, in effect, outsourced arms of government.
They are forced to make and take decisions which are not in their interests, nor the interests of their investors, staff or customers, for reasons which they largely don’t believe in or even understand.
There are numerous examples. For big business, the rise of diversity and inclusion policies, fuelled by the Equality Act, have compromised the search for merit in hiring and firing, in a manner that many feel is discrimination on irrelevant grounds (i.e. exactly what the Equality Act is supposed to prevent).
For both big and small businesses, the complexity and range of employment rights is beyond what anyone (apart from a very well-resourced HR department) can understand, let alone follow.
Employers have become a discriminated-against minority, with unknowable, uninsurable obligations heaped on them by layers of employment legislation, such that it is no longer a rational choice to become an employer.
So single-handed self-employed workers (electricians, plumbers and decorators, for example) take a huge (and somewhat irrational) step if they take on PAYE employees.
Suddenly, they are liable for potentially large payments under the Employment Rights Act 1996 (and the Equality Act) for reasons that bear little or no relation to their or their workers’ behaviour.
Employees, by contrast, take on in effect no obligations at all when they take on a job. All rights, no obligations.
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On immigration, the Government has encouraged an ultra-lax policy, based on the economic principle that low-wage, low-skill immigration solves manpower problems in the health, social care and hospitality sectors, obviating the need for employers to attract, train and retain UK-born workers and/or invest in productivity improvements via capital investment.
Ignoring the social, cultural, religious and other consequences of very high immigration levels, this policy will depress labour productivity, and hence real wages.
For developers of residential, commercial and of infrastructure, planning law has become so labyrinthine that they routinely need multiple years, not months, to get permission for even quite simple projects.
Residential developers are lambasted by government for “hogging” development land, but they are businesses trying to make a profit for their shareholders, and “banking” is simply their response to the enormous difficulty of acquiring and getting permission to build on land in a timely manner.
For the UK’s most successful sector – financial services – which has double the national average in output per hour worked, and is large (at 8pc of the economy, and an even larger taxpayer), the position is even worse.
After the banking disasters of 2008-9, not (by the way) initiated by the UK, but by unwise mortgage lending in the US, the UK Government has had it in for this sector.
I am not going to defend poor behaviour by some UK banks, because it is indefensible, but I am going to attack the Government’s subsequent attitude towards the sector.
Instead of allowing the banking sector to reform itself – badly damaged shareholders would have seen to that – the Government introduced layer upon layer of innovation-sapping regulation, designed to humiliate and subdue senior bankers.
These rules, too numerous to enumerate here, spilled over into the other, perfectly innocent financial services sub-sectors of asset management, market-making, debt, equity issuance and private equity – none of which caused the credit crunch, and all now hamstrung by onerous regulations and pay limits. The result is a sector that has been hollowed out and its vibrancy and ability to contribute to UK productivity reduced.
But the Government has not just distorted decision-making, it has also intervened in several sectors with targeted taxes and subsides, to distort the marketplace to the extent that prices no longer send signals to business people and their customers in a productive way.
Which sectors? The most obvious is the energy sector, where the imposition of the arbitrary Net Zero timetable has upended normal economics.
The only consequence of this will be the failure of innovation and improvement, and ultimately more expensive and less secure energy for the UK population.
Its effect on the planet will approximate to zero. There are plenty of other large, important sectors where the Government’s behaviour is stalling growth.
Healthcare, a growing sector, is largely a planned economy under the NHS, and international health outcome comparators demonstrate clearly that the NHS is both expensive and inefficient (whereas it used to be cheap and inefficient).
We shouldn’t be surprised at this – we laughed at the East German car the Trabant in 1989 when it became clear that this was the best a well-organised planned economy could do by way of car manufacturing – and the comparison with its neighbours in the West producing BMWs and Mercedes.
The NHS is our Trabant – not the envy of the world, but something of a laughing-stock compared with other Western systems.
If you disagree, compare our health outcomes and aggregate cost with Australia. The solution to all this? We have come so far down this direct and indirect control by the state that I cannot see an easy way to reverse it.
Perhaps an existential crisis? Perhaps a populist revolution? Or maybe we will continue to decline into international irrelevance?
But my prediction is that without a fundamental reduction in the level of interference in the UK economy by the state, the UK will find it almost impossible to grow real per capita income, whatever our politicians claim to be doing to encourage growth.
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