A week is a long time in politics. A year is an eternity. In less than a year, the new Labour administration in the UK has seen its popularity plummet, with voters’ anger becoming louder. The risk of a political implosion in the government is no longer a far-fetched possibility. So what is behind this sudden fall in optimism that things could only get better for the British people in future?
Most analysts place too much emphasis on the scrutiny of the short-term prospects of inflation, employment and growth in their periodic forecasts. They do not focus enough on the underlying socioeconomic structural strengths and weaknesses.
Like most European countries, the UK faces bleak economic prospects because structural reforms have been delayed too long. Most political leaders focus on short-term electoral expediency rather than having the courage to define and implement necessary change.
The risk of this mindset is that structural weaknesses become almost unmanageable when not addressed in time. In a democratic system, this reality means that whoever has what it takes to lead a programme of economic change would be shunned by voters at the next election.
Like other European countries, one of the main reasons why the UK is facing slow growth and high inflation is because business investment remains too low. In the UK, capital spending as a share of GDP has fallen from around 20% in 2007 to less than 15% today. The government has a national infrastructure plan, but the time lags in getting major projects up and running are too long.
Research from the London School of Economics highlights that the UK’s productivity lags behind that of France, Germany and the US, primarily due to chronic underinvestment in capital and skills. Underinvestment hampers the adoption of productivity-enhancing practices across firms and regions, further entrenching economic disparities.
The whole of Europe has become like a geriatric ward with patient countries suffering from severe economic atherosclerosis
The decline in manufacturing is particularly worrying despite some notable successes, such as car assembly. Economists understandably argue that Britain continues to be heavily reliant on financial services.
The incumbent Labour government was bequeathed a dismal economic inheritance. The electorate wanted a change not because they believed Labour had a magic wand to reverse the socioeconomic decline but because they were fed up with 14 years of Conservative rule. The Labour Party failed to explain the pain that the country would have to go through to put things right in the long term.
Under different administrations, the national debt had been allowed to balloon for too long, productivity stagnated and real wages fell. Despite the acrimonious debate on Brexit and immigration, historic levels of migration were used to push GDP up while wealth per head fell and infrastructure became run down.
Structural inequality is a critical issue in the UK, as in other European countries. Real wages have been declining for a vast number of people. Pensioners are the worst hit, with many no longer being able to rely on their savings. At the same time, the neo-liberal mindset of letting executive pay continue to outpace the growth of average earnings by a vast amount has increased the income and wealth gap between the haves and have-nots in society.
There is no easy fix to the challenges the British economy faces. The daunting task of putting things right has fallen on Chancellor Rachel Reeves. Despite the government’s comfortable majority in parliament, plots may already be hatched in the dark corridors of power to find a scapegoat for the current electoral unpopularity. Business leaders who have focused on maximising profits for too long and treating labour as a disposable commodity are up in arms against the budget decision to raise national insurance from 13.8% to 15%. Some companies have started discharging workers and forecasting an apocalyptic labour market scenario in the coming months.
Some are now arguing that the UK has become ‘The sick man of Europe’, an unflattering title long held by Italy. The reality is that the whole of Europe has become like a geriatric ward with patient countries suffering from severe economic atherosclerosis.
For most countries, turning the ship around will be a long-term project involving a coherent and sustained strategy focused on enhancing productivity through investment in capital and skills, promoting policy stability and creating an environment conducive to innovation and growth.
This is not the time for any populist or traditional European politician to resort to schadenfreude, rejoicing at the misfortune of others.