The roots of Britain’s economic woes lie in weak productivity growth, economists said. Equipping workers to produce more goods each hour is the key to expanding the economy and raising living standards. And it is what has been missing from Britain’s recent performance.
British productivity rose steadily for nearly three decades but has flatlined since the 2008 financial crisis.
The government austerity and recurring political crises that followed the Great Recession discouraged companies from investing to make workers more efficient, economists said.
“What does it mean? It means you’re working with outdated equipment and less of it,” said Rob Wood, chief U.K. economist for Pantheon Macroeconomics in Newcastle upon Tyne.
The government met the crisis with an “age of austerity,” which hurt public services and crimped economic growth.
“We’ve learned that public austerity destroyed the private sector as well. We need to invest,” said David Blanchflower, an economics professor at Dartmouth College, who served on the Bank of England’s monetary policy committee before the 2008 crisis.
Erecting commercial barriers against its largest trading partner will shrink the U.K. economy by 4 percent and will leave both exports and imports roughly 15 percent lower than if the country had remained in the E.U., according to the Office for Budget Responsibility, an official agency.
Last fall, Prime Minister Rishi Sunak canceled the second half of a high-speed rail line intended to link London with northern cities. First proposed in 2009, the line — billed as Europe’s largest infrastructure project — was to have connected the capital with Birmingham and Manchester, farther north.
“The sheer political and policy volatility [means] businesses don’t know whether they are coming or going,” Wood said.
Starmer’s meeting with Biden on the sidelines of a North Atlantic Treaty Organization summit underscored the “special relationship” between the allies.
In a Washington speech last year, Reeves sketched an economic formula that resembled Treasury Secretary Janet L. Yellen’s doctrine of “modern supply-side economics.” The two share an enthusiasm for spurring growth by expanding the labor force and investing in infrastructure and climate-friendly energy sources.
Relative to the size of its economy, the U.S. public debt is a bit larger than that of the United Kingdom. But the dollar’s status as the global reserve currency gives the U.S. government more latitude in dealing with its spending issues. Labour has said it will abide by an informal fiscal rule developed by the previous U.K. government.
Labour also has ruled out increasing personal income taxes, the national insurance levy or the value-added tax.
Budgetary realities already have caused Labour to shrink its ambitions.
In February, the party scrapped its pledge to spend 28 billion pounds, or roughly $36 billion, each year on green energy programs. Instead, officials said annual spending would hit 4.7 billion pounds, or $6 billion.
Labor wants to speed planning approvals to build 1.5 million homes over the next five years and to overhaul the energy grid.
The new government this week ended the Conservatives’ ban on onshore wind farms. Instituted in 2015, it allowed a single objection to block projects.
Labour faces a daunting to-do list. But it may enjoy a short-term tailwind. Inflation in May was running at an annual rate of 2.8 percent, down from its peak near 10 percent in 2022. After a brief recession last year, growth is beginning to stir. The International Monetary Fund expects the economy to expand by 0.7 percent this year and accelerate to 1.5 percent in 2025.
With inflation falling, the Bank of England could soon cut its 5.25 percent benchmark lending rate for the first time in four years, which would give the economy a boost.
Labour’s massive parliamentary majority and the disarray in the ranks of the opposition Conservatives mean that Starmer can expect to remain in office for at least a full five-year Parliament, if not two.
That relative stability comes as other major economies are preoccupied with domestic politics. In France, the left-wing coalition that triumphed in parliamentary voting this month has endorsed free-spending policies that could unsettle financial markets.
And the United States is in the midst of a divisive presidential contest, which could return an unpredictable former president to the White House.
“In an uncertain world,” Reeves said on Monday, “Britain is a place to do business.” – THE WASHINGTON POST
- Writer is a staff writer on the financial desk who joined The Washington Post in November 2017 after working for the Financial Times, Bloomberg News and USA Today.
