The Challenges Facing Britain’s Economic Growth
Rachel Reeves, Kwasi Kwarteng, and numerous current finance ministers—both British and global—share a common aspiration: unlocking the secret to sustained economic growth.
For Reeves, the focus is on stabilizing public finances, increasing infrastructure investments through public sector initiatives, fostering public/private partnerships, and easing planning regulations. However, unless these changes are truly transformative, they may just perpetuate the familiar cycle of reducing bureaucracy that has long been a source of humor, as seen in the classic series Yes, Minister.
Conversely, Kwarteng believed that tax cuts—prior to his abrupt departure following the Tory mini-budget in September 2022—were the solution. He envisioned these cuts boosting the UK’s economic growth rate from under 1 percent annual growth during the period following the 2008 financial crisis and before Covid, to a more vigorous 2.5 percent. However, the financial markets had a different perspective.
The relentless focus on enhancing economic growth is not merely about increasing individual wealth; it significantly influences government fiscal balance. An increase in gross domestic product (GDP) results in greater government revenues, facilitating funding for public projects, fulfilling political commitments, and potentially ensuring re-election for those in power.
In the absence of growth, the public faces elevated tax burdens, stringent austerity measures, and unfulfilled promises. With time, voters disillusioned by the unrealistic hope of low taxes coupled with generous public benefits may gravitate towards simpler yet often misguided narratives presented by populists and nationalists.
Nevertheless, fostering economic growth poses a significant challenge, especially when current trends suggest otherwise. Past Chancellors from the 1950s and 1960s such as “Rab” Butler, Harold Macmillan, James Callaghan, and Roy Jenkins enjoyed average annual growth rates of 3.2 percent. Even during the tumultuous 1970s, growth remained slightly above 2 percent per year, while the 1980s and 1990s experienced GDP growth at 2.7 percent, amid the rise of a dynamic free-market environment.
Unfortunately, since 2000, average annual growth has stagnated at a mere 1.5 percent, following a bright start to the decade that has since been overshadowed. This inadequate growth has led to disappointing government revenues, intensified spending pressures, rising tax rates, continual efforts to impose financial discipline, and unprecedented increases in government debt during peacetime.
While Reeves’s targets for growth appear less grandiose compared to Kwarteng’s ambitions, her goal of achieving the fastest growth in the G7 is still ambitious—much more easily attainable in the face of an economic downturn in the US than through a UK resurgence. Yet, she can argue, based on reasonable evidence, that the last two decades have presented particularly difficult circumstances, largely due to the repercussions of the financial crisis, the impact of Covid-19, and the energy crisis following Russia’s invasion of Ukraine.
Nevertheless, these contextual factors may serve as convenient scapegoats, veiling the deeper, more enduring challenges to economic expansion.
A pertinent question arises, reflecting on Harold Macmillan’s famous observation in 1957: Why was economic performance so robust during the latter half of the 20th century? What resulted in stronger growth during that era compared to the following years?
This remarkable era of growth was fueled by a complex blend of positive factors, many of which have either diminished or reversed: increased global trade, expanded access to higher education, greater female participation in the workforce, the rise of consumer credit, and, crucially, the integration of millions of baby boomers into the labor market.
For a considerable portion of the latter half of the 20th century, the UK and other developed nations enjoyed a favorable demographic structure: as life expectancy rose, the workforce expanded more quickly than the aging population. Currently, however, this trend has inverted, leading to surging expenses in pensions, healthcare, and social services, all impacting the shrinking productive sectors of the economy. The fiscal landscape is poised to deteriorate further, characterized by an ongoing rise in government debt as a percentage of GDP, which could conflict with Labour’s fiscal commitments.
As citizens, we often resist confronting these harsh truths, preferring instead to embrace the unrealistic pledges found in political party platforms. Politicians propose boosting growth through advances in artificial intelligence, new trade agreements, efficiency optimizations, technology innovations, and infrastructure upgrades—factors that all too often promise relief from fiscal constraints.
If achieving growth were truly straightforward, previous leaders would have already succeeded. Looking regionally, countries like Germany and France demonstrate stagnation, Italy’s growth remains minimal, and Japan has experienced stagnation as well. Although the United States has fared better, it too is encountering diminished dynamism and reliance on substantial budget deficits—a strategy more manageable for those wielding the world’s primary reserve currency.
What happens if the UK fails to regain growth? The options seem scant: Raise the retirement age, increase immigration to enhance the working-age demographic (which had limited success post-financial crisis), raise taxes beyond the current focus on employers, independent schools, and agricultural sectors, slash public spending, or increase fiscal regulation compelling financial institutions to lend more to the government, potentially at the cost of other borrowers. Alternatively, higher-than-expected inflation could emerge, historically serving to lower the real value of debts, including governmental liabilities, and nominal savings.
None of these strategies offer much solace. Yet, some of these measures could very well be on the horizon.
In other news, while Donald Trump, president-elect, has presented numerous intriguing appointments for his upcoming administration, he has not recently addressed the Federal Reserve—America’s central bank responsible for determining interest rates and other financial policies. Previously, he has been critical of the Fed’s chair, Jerome Powell, but his recent remarks have suggested that he believes the president should have significant input in the Federal Reserve’s operations.
Powell’s current term concludes in May 2026, and speculation arises about the potential for changes ahead.
Economists typically assert that central banks operate independently, free from political pressure—an appealing notion for those wary of a return to the chaos of inflationary policies. However, this view doesn’t align perfectly with reality.
The level of independence differs among central banks, as exemplified by the European Central Bank’s ability to set its own inflation targets compared to the Bank of England, which does not enjoy the same liberty.
Furthermore, individual leadership styles play a crucial role in shaping central banking decisions. The Federal Reserve of the 1980s, despite being legally similar to its 1970s counterpart, was dramatically different under the leadership of Paul Volcker, who aggressively tackled inflation, unlike his predecessor Arthur F. Burns, who faced significant external pressures.
As history reveals, central bankers exhibit varying degrees of independence. Should Trump choose to intervene with Federal Reserve operations, it could trigger anxieties in the financial markets. Investors have already reacted to hints of impending changes, with ten-year US Treasury yields—key indicators for global borrowing costs—soaring as they anticipate potential shifts.
Stephen D. King has authored several economic books, including “We Need to Talk About Inflation” (Yale, 2023), and serves as a senior economic adviser to HSBC.
David Smith is currently unavailable.
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