The State We're In

The UK in a Changing Europe (UKICE), led by Professor Anand Menon, is a comparative newcomer among think tanks. Though it does not owe its existence entirely to Brexit, it came into being in the period between David Cameron’s referendum announcement and the event itself in June 2016. In January, it produced a 15-chapter report called The State of the UK Economy 2024.

“The last year seems to have crystallised two potentially dangerous tendencies in British politics,” the report’s authors write. “The first is to argue that our economic performance has been so bad that ‘we can’t go on like this’. The second is that our policy options are so constrained that nothing can be done.”

The aim of the state of the economy report, therefore, is a constructive framing both of where we stand and what might be done about it.

The challenge

The report starts with Stephen Hunsaker’s assessment of the growth and productivity problem. He notes that the UK’s economic performance since the 2008 financial crisis has been very poor in historical terms. Productivity growth has slowed from close to 2% a year before the crisis to 0.3 % a year after it.

At the heart of the productivity problem is weak investment. Employment, in contrast, has been strong. The challenge, argues Hunsaker, is to make those workers more productive, and to address the UK’s decline in trade openness – traditionally a productivity driver – since the Brexit referendum in 2016.

Strengths and weaknesses

Professor Jonathan Portes, the report’s editor, and Sarah Hall, deputy director of UKICE, address what should be done about this challenge using a SWOT (strengths, weaknesses, opportunities and threats) analysis.

The UK’s strengths include a disproportionate share of global universities, pockets of advantage in manufacturing (such as aerospace), a well-educated workforce, and comparative advantage in sectors such as finance, insurance, legal services, and consultancy. These benefit from the fact that London’s geographical position means that most major global firms regard it essential to have a significant presence there. The problem is that these sectors are hard to fit in with an economy that benefits all regions, as they tend to be associated with the professional classes of the south of England.

The weaknesses are well known. They include persistently low public and private investment, weak skills below tertiary level and entrenched inequalities. The strength of the UK’s institutions is also undermined by over-centralisation.

What about opportunities? The UK is well-placed because of its comparative advantage in high-value services, for which global demand is strong. It also has scope for “catch-up” growth. Some threats to the UK economy include a rise in protectionism and emerging geopolitical risks, whilst demographic trends, political dysfunction and Brexit present ongoing challenges.

Further economic challenges

In his chapter, Ethan Ilzetzki examines the UK’s macroeconomic framework after 25 years of Bank of England independence. Though independence had been seen as instrumental in solving the UK’s problem of being materially more inflation-prone than other big economies, inflation’s recent spike had called this into question.

There are also big problems when it comes to fiscal policy, despite the establishment of the Office for Budget Responsibility (OBR) in 2010, which has limited ability to constrain governments. According to Ilzetzki, the most important single reform the government could make would be to give the OBR greater powers in this area.

Productivity is not only a source of weakness but also of the UK’s wide regional disparities, as Henry Overman writes. In 2002, London had productivity 40% above the UK average, but by 2019 this had risen to 50%. What to do? The UK’s success in high-value services points to increasing their role in the big regional cities. Greater Manchester is a case in point, with productivity 35% below that of London. To narrow that gap to 20% would require increasing Greater Manchester’s business capital by £30 billion, and its graduate workforce by 180,000. These are big figures but not beyond the realms of possibility.

In other chapters, Arun Advani and Andy Summers propose a four-pronged approach to tax reform. Ben Zaranko looks at public services, noting that performance on delivery is poor, notably the NHS. He asks: are we willing to pay more in tax to maintain the current range and quality of services? If not, what are the things the state currently does that we think it should stop doing?

Nevertheless, Patrick Dunleavy suggests that substantial public sector productivity gains are possible. They include taking advantage of advances in data science and artificial intelligence (DSAI), a rapid expansion of service industry robotics, and the devolution of delivery current provided badly by Whitehall to local agencies.

Finally, David Bailey and Philip Tomlinson tackle the tricky area of industrial policies and net zero, suggesting that the UK needs to get serious about a ‘Green New Deal’ if it is to meet its own net-zero commitments, build low-carbon resilience in its own energy supply, re-shore critical manufacturing and compete with the US, EU and China.

Interest in fixing the country’s economic problems historically arises during times of change, and when the country is deemed to be underperforming. The ideas presented in the UKICE report would, if implemented, help prevent the UK falling into a cycle of doom. Against this, politicians tend to favour solutions which have a short-term payback. The lesson of this report is that we have to think long-term.