Daniel Freeman is Managing Editor of the Institute of Economic Affairs.
Britain has a growth problem.
British 18-year-olds today find themselves in a country which has only seen real GDP per capita rise by 7 per cent over their lifetimes.
This does not compare well to previous generations.
If you were born in 1960, by the time you turned 18 you would be living in a country that was 51 per cent richer. If you were born in 1970 it was 58 per cent richer. Born in 1990? 48 per cent richer. You get the idea.
From the 1950s until about twenty years ago, we enjoyed a surprisingly consistent long-term trend of real economic growth. From birth to adulthood, a child might live through recessions, oil shocks and strikes but on average, by the time you could buy a pint, the country would have become about 50 per cent richer. For most of the late 20th century and until the early years of the 21st you could reasonably expect to live in a country that had doubled in prosperity every 35 years.
But since the global financial crisis, Britain has seen a new trend rate of growth that is around a quarter of what we had previously come to expect. If this two-decade trend of low growth is not broken, today’s 18-year-old will have to wait until they are 140 (or more likely emigrate) before they experience the doubling of living standards we once saw every generation.
Something is clearly going wrong, and the most important question in British politics and economics should be what.
This is the question a forthcoming Institute of Economic Affairs book, The Great Stagnation: Why Britain Stopped Growing, tries to answer. Out in paperback next week, in its chapters economists from the UK and beyond present different theories for what has caused growth to slow so dramatically over the last two decades.
Perhaps the most original of the book’s chapter is by former chair of the White House Council of Economic Advisors, Tyler Goodspeed, which argues that post-2008 banking regulation unintentionally starved British businesses of credit they had previously relied on to expand. Goodspeed points out that while the UK and US were similarly badly hit by the financial crisis, of the two only the UK saw a significant downward shift in trend growth.
He argues that regulations, such as those introduced in the Basel III framework, incentivised banks to take on larger quantities of what regulators saw as safer government debt at the expense of private sector lending.
While the US also tightened banking regulation, businesses there weren’t hit as hard. Firstly, because US businesses have greater access to non-bank finance from venture capital or angel investors, they are less reliant on loans from banks to finance expansion. Only 40 per cent of lending to American businesses comes from banks, as opposed to over 60 per cent in the UK.
Secondly, the fragmented nature of the banking system (there are about 5,000 banks in the States compared to less than 300 in Britain) means that many US banks are simply too small to be hit by the regulatory requirements that do affect Britain’s more concentrated banking industry. While US lending recovered to pre-crash levels by 2014, lending to the private business sector in 2025 Britain was still 15 per cent lower in real terms than it had been in 2008. For us the credit crunch never really ended, making it difficult for small and medium businesses to scale up in the way that they can in the US.
While Goodspeed’s chapter is backed by compelling data, access to credit is unlikely to be the whole story of the UK’s troubles.
David Turver points to the role played by the rising cost of energy, particularly industrial energy, in undermining energy intensive industries that were once key drivers of British productivity growth. Even accounting for inflation, electricity is now more than double the cost it was in the UK in 2005.
Though ministers in the current government like to pin the blame for this on geopolitically induced rises in gas prices, Turver points out that there has been a continuous increase in costs driven by efforts of successive governments to decarbonise the UK’s energy supply. This has yet to deliver the hoped for net savings, which the author doubts will materialise.
My colleagues Valentin Boboc and Kristian Niemietz address the economic problems that result from land use planning and other regulation on the construction of frankly anything in the UK. Britain’s planning-induced housing shortage is well known, but Boboc also points out how environmental and procurement regulations have driven up the cost of infrastructure and inhibited labour mobility and growth.
Of course, these are not problems that began in the last two decades, but over time as populations grow and existing infrastructure becomes worn down these can become more binding constraints on growth.
While many on the centre left, including some in the government would accept that planning constraints have seriously hampered growth, they would also add ‘austerity’ and Brexit to form a trio of assassins of British growth. Julian Jessop, in his chapter addresses austerity and Brexit together. Jessop points out that the austerity was a fairly slow reduction in government spending as a share of GDP.
From a peak of 47 per cent of GDP, government spending fell to 42 per cent by 2015 and only dropped below 40 per cent in 2019. The US cut back the size of the state more aggressively from 40% of GDP after the recession to 34 per cent by 2015 but did not suffer the dramatic growth slowdown Britain did. Brexit probably has had a net negative effect on growth so far, but even under worst-case assumptions, nowhere near large enough to explain Britain’s growth slowdown which precedes it by a decade.
There is much more in the book than can be outlined here, including a fascinating chapter by tax expert, Tom Clougherty, highlighting how Britain’s tax system has become increasingly hostile to growth even before the post-covid rise in the tax burden, and a chapter by veteran labour economist Len Shackleton on how the UK’s flexible labour market has steadily been eroded hindering the creative destruction on which productivity growth relies.
Reading about all the ways Britain has sabotaged its own prosperity over the last two decades is certainly a depressing read. But in a way it’s also hopeful.
We do get a lot right, and much of what we get wrong amounts to us banning growth that politicians or voters have concluded is bad form for us to have. Having legislated and regulated ourselves into this stagnation, largely in a fit of absence of mind, we can legislate and deregulate ourselves out. But if we’re to do that effectively we first have to diagnose what’s gone wrong.