To consider David Cameron, Britain’s new Foreign Secretary, is to remember Suez. Cameron’s legacy will forever be that he committed the greatest prime ministerial blunder since Anthony Eden’s misadventure, which became emblematic of Britain’s post-colonial decline. As Cameron left Downing Street in 2016, he too left the UK searching for a new place in the world, isolated once again from its international partners. The timing was particularly poor: a new age of insecurity was dawning, with geopolitical tensions fragmenting markets that had been trending open since the end of the Cold War.
The similarities are not just geopolitical, they are also economic. The post-Suez period was one of relative economic decline. In 1950, the economies of France and West Germany were 25 per cent and 40 per cent smaller than the UK’s. By 1973, both were larger. A sense of decline loomed large in the national psyche. The invention of national statistics made economic decline visible for the first time. And it came alongside decolonisation and humiliations on the international stage: not just Suez, but also two rejections from the Common Market.
Once the UK was finally let into the European Economic Community, it began to outpace its peers. In 1973, US labour productivity was more than 50 per cent higher than Britain’s. By 2000, that lead had halved. From the mid-1990s, the ICT revolution took hold. The UK’s relatively flexible labour markets meant it was well-placed to embed these new technologies in organisational practices, and Britain started to close the gap with Europe, with productivity growth rates 0.3-0.4 per cent higher than France and Germany from 1995-2007.
But under this Conservative government, from Cameron through to Sunak, we have returned to a trajectory of decline. Now, unlike after Suez, that decline is not just relative to peers, but also absolute, with real wages in Britain no higher than they were in 2005.
In a new report, Labour Together has looked at why Britain’s economic policy regime has failed over the past 13 years, and how we can fix it.
Primarily, the UK’s economic failure is the result of low productivity. For each hour we work, Britain’s economy creates less than our more productive peers. In the past decade productivity growth has been at its lowest in any period since before the first productivity gains of the Industrial Revolution.
The UK’s productivity shortfall vs its peers increased from around 20 per cent to nearly 25 per cent between 2010 and 2022. This relative decline is notable. Countries that are behind the so-called frontier should be able to catch up to more productive peers, by imitating what makes them so productive. Analysis from Labour Together shows that if the UK had converged to peers at a typical rate, our productivity would now be 12 per cent higher. As improvements in productivity tend to move directly to increased wages, Britons should be earning nearly £5,000 more each year – far more, it should be noted, than the recent rise in their household bills. It would also have been a route to improved public services. We could have had around 15,000 more doctors, over 40,000 more nurses, and around 75,000 more teachers while keeping spending constant as a share of GDP.
Like so much else in Britain today, our poor productivity is a story of regional inequality. Our productivity levels are far more regionally unequal than our peers. This includes, quite remarkably, a country like Germany, whose least productive regions were, until just 30 years ago, occupied by Soviet troops.
Low investment, low productivity
The cause of the UK’s uniquely low productivity is low investment. Both public and private investment in Britain have languished at the bottom of the pack for decades. The Office for National Statistics has shown that between 2009 and 2019, capital levels per worker in the UK fell, reducing productivity. In comparable countries, the opposite was true. Had the UK pursued the increase in capital-per-worker of its peers, it would have roughly matched their productivity growth.
To start catching up with peers again, we must rebuild Britain’s public realm. UK growth is held back because we have too little infrastructure in the north, too few houses in the south, and expensive energy everywhere.
Two key facts shape how we must deliver the investment to transform the public realm. First, there are limits to what we can do safely with the state’s balance sheet. It is little more than a year since the Conservatives’ mini-Budget created a sovereign debt crisis. People are still dressing as Liz Truss for Halloween. Second, while both our public and private investment levels lag behind those of other advanced economies, 85 per cent of the gap in total investment is accounted for by private investment. If we wanted to fill the gap through public investment alone, we would need to triple it and bring it to a level no advanced economy has had for decades.
And so boosting private investment is a must. Catalysing public investment is one route. The Inflation Reduction Act in the US has set off a boom in private clean-energy investment, with more than $200bn in private capital deployed in the sector last year. The Energy Independence Act outlined by Ed Miliband would have similar effects.
But to ensure that public investment crowds in the most private investment, we need to make regulatory changes. The new towns programme instituted by Clement Attlee’s government still brings in around £1bn a year for the Treasury to this day. But new towns stopped being profitable for the public when the Conservatives brought in a law that meant landowners win big from public development. Instead of land value being based on its current use, it started to also include the “hope value” from possible planning permission. Reforms to return payments to landowners to fair current-use values could enable the delivery of new towns that provide necessary housing, boost growth and return a profit to the public purse.
David Cameron’s return to front-line politics is an unwelcome blast from the past. It underlines how little new thinking there is in our government today, and that extends to economic policies. We are still suffering under the same economic model that undershot European productivity growth in a decade where the continent experienced a multi-year debt crisis.
By combining catalysed public investment, regulatory reforms and a partnership approach, we can drive private investment higher. To get back to growth, we need an economic model that encourages investment in Britain’s public realm, building infrastructure, cheap home-grown renewable energy and housing.