Long time readers of
this blog will be familiar with this chart, of UK real GDP per capita
since just after WWII.
It shows a
remarkably constant trend rise of output/income per head of 2.25% per
annum since 1955. The booms of the mid-70s and end-80s, and the
recessions of the early 80s are only just visible, but thankfully the
trend in GDP per capita always reasserted itself. Until, of course,
the period after the Global Financial Crisis, when it didn’t in a
quite spectacular way.
Not only did we not
bounce back in any way from that recession, but GDP per head started
growing more slowly. (These observations are so much clearer when
using GDP per head, rather than GDP which is strongly influenced by
inward migration.) I watched and blogged in horror as the gap between
the previous trend and what was actually happening to living
standards [1] kept growing wider.
The little blip at
the end is the pandemic of course, and once again using GDP per head
shows clearly how we are yet to fully recover in terms of living
standards. At the end of 2021 GDP per head was almost 4% lower than
it was in 2019. (Once again, it shows how misleading using GDP data
is if you are trying to gauge anything to do with welfare.)
Remarkably GDP per head at the end of 2021 was only around 5.5%
higher than it was at the end of 2007! (That is annual growth of less
than 0.4%!).
However, using a
constant trend rate of growth of 2.25% as a reference point was a
convenience rather than a realistic aspiration. The main reason is
that trend growth has for some time been slowing down across the
world. What to use instead? In the chart below, I compare the UK to
the global technological leader, the United States. I make no attempt
to make a realistic comparison of levels of income per head, which is
in any case distorted by factors like workers in the US have less
holidays than we do in europe, for example. I’m just concerned with
the trend rate of growth in GDP per capita.
I have scaled US GDP
per capita (red line) so that it matches the level of UK GDP per
capita from the mid-50s until the mid-80s. UK and US
living standards were growing at a similar rate over that period.
There was much angst in the UK at the time about economic decline,
but that in part reflected a dynamic Europe, and also we were not
catching up with what is generally agreed is a large level’s gap
with the US. You can see by eye that US trend growth in GDP per capita starts to decline as we reach the middle of the period.
The first
interesting deviation from parity of growth rates starts in the
mid-80s, and is clearer if I redraw the chart starting in 1979.
UK GDP per capita continued to grow at a constant rate in the 1980s and 1990s, while US GDP per capita growth started to decline from the late 1980s. This divergence grew wider during the period of the Labour
government, such that by the end of 2007 we were ahead of the US
trend by 6% compared to previous levels. You can tell many stories
about this apparent success story, but it does correlate with more
detailed studies of trends in growth over this period: the UK was
more than holding its own, and catching up in level’s terms with
the US and to some extent France and Germany.
But that is just the
backdrop to the main point of this post. Since the GFC, the UK has
been doing worse than the US consistently, reversing all of the
post-mid 80s gains. Half of the 6% gain was lost during that crucial
austerity period from 2010-12. Of course all countries around the
world did badly through a common policy of austerity after 2010, with
the important exception of China. Only in China was a substantial
Keynesian expansion created that offset the impact of
the GFC. But, compared to the US, the UK lost ground.
The next major
period of UK decline began shortly after the Brexit referendum. By
the end of 2019, that initial 2007 6% gain had fallen to little over
1%. The policy response in the pandemic made it worse still. By the
end of 2021 the UK had fallen to just over 2% below the US line,
reflecting a stronger (stimulus led) US recovery from the pandemic.
If we take the period from the start of 2010 until the end of 2021 as
a whole, UK GDP per capita appears to have grown by 6% less than US
GDP per capita. That is, since 1955, an unprecedented period of
economic decline for the UK.
To show this isn’t
an artefact of my method, here is a small table
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30027 |
32514 |
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202068 |
234497 |
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In the table I’ve
included data for Germany (the only major EU country with data for
2021 on Eurostat). Germany is also falling behind the US, but by less
than the UK. The reason is straightforward – Germany is also addicted
to an austerity mindset.
This is the reality
behind the government’s bluster of strong and steady growth.
Macroeconomic success should be measured in terms of GDP per head, and not
the size of some government deficit. Forget cherry picked statistics
after the UK suffered the largest fall in GDP during the initial
pandemic. This is the reality – an unprecedented decade of relative
macroeconomic decline that started in 2010, and with Brexit still
influencing growth there is no end in sight.
This analysis ties
in the underlying growth in the economy, taking out the direct impact
of migration, with the UK’s so
called cost of living crisis. These are not separate
problems, but as Rachel Reeves highlighted in a recent
speech they have a common cause, which is weak UK
growth. The government cannot at the same time appear fatalistic
about falling living standards and yet try to talk up UK economic
performance, because to do so is mutually contradictory. Advancing
living standards, particularly those at the bottom of the income
distribution, is what good management of the economy is all about.
It is always
relatively easy to find reasons why this UK macroeconomic decline is
all bad luck, and nothing to do with policy. It always is. But since
the Conservatives came to power in 2010 they have had two big
economic ideas which directly influence macroeconomic performance.
The first was prioritising reducing the deficit over the recovery
from the GFC recession and, more recently, the pandemic recession.
The second was Brexit. Both have been disastrous for the economy, and
predictably so as they went against basic economic principles.
There is a refusal
among Conservative MPs and ministers to recognise the recent reality
of UK macroeconomic decline we are now living through (and its
contrast to our earlier strong performance), let alone their
responsibility for it. Instead they live in a fantasy world, and try
to convince us their fantasy is real. Apart from the regular use of
cherry picked and misleading statistics, we have a situation where
the queues of lorries waiting to be checked at Dover are nothing to
do with Brexit, they tell us, but because of EU red tape. You
wouldn’t want such people in charge of the most trivial tasks, let
alone managing the economy. It is time to recognise the reality of
recent UK macroeconomic decline, and to assign responsibility for it in two huge failures of economic policy.
[1] GDP per head is
equivalent to the average income generated by domestic output per
head. Of course that average is hiding the gradual redistribution
of income towards the 1% in the 1980s and 1990s, a redistribution
which has had a significant
impact on median wage growth during that period.
Finally the purchasing power of median UK earnings has declined
because of two recent depreciations in sterling: the first during the
GFC and the second after the Brexit referendum.
