Improving a Stagnant Economy in 2024: Britain Needs to Take a New Route to Greater Prosperity

Emily Fry

Senior Economist at the Resolution Foundation

Proposing a comprehensive strategy to uplift the UK’s economy, the Resolution Foundation advocates for leveraging the country’s prowess in service sectors, revitalising major urban centres, prioritising long-term infrastructure investments, improving employment standards, and fostering inclusive prosperity.

A Poorly-Performing Economy, but an Optimistic Outlook

It has become fashionable to say that the outlook on the UK’s economy is bleak. Some even argue that the upcoming General Election is a poisoned chalice – whoever wins will inherit a nation with low growth, stagnating living standards, rising taxes, and squeezed public services.

But neither Jeremy Hunt nor Rachel Reeves would pass up the opportunity to be Chancellor after the next Election, and for good reason too. Yes, Britain has been through the longest pay squeeze since the Napoleonic Wars, and it faces some really tough decisions on tax and spending. But the medium-term outlook can change, especially with a tailwind of a serious economic strategy. Britain should aspire to be a far more prosperous nation by 2030. Here are five steps the next Chancellor could take to achieve it.

Five Missions for Government, Five Steps for the Economy

• Build on your services strengths. Politicians and economists talk a lot about what Britain is bad at (large-scale public infrastructure) and what it used to be good at (making cars, trains, and boats). But we don’t talk enough about what we’re currently good at – from banking, legal, accountancy, and engineering to our world-class universities and creative industries. Britain is a services superpower, exporting more of these services to the rest of the world than any other country, bar the US. Not only are we world leaders across a diverse range of service sectors, but global demand for these services is growing far more rapidly than goods. Indeed, global exports of the services the UK specialises in tripled between 2005 and 2021, compared with goods exports which doubled in the same period. The next Chancellor should help leverage these services strengths – from signing ambitious new services trade agreements to refocusing domestic policy on how to encourage service sector firms to cluster and grow. This brings us onto…

• Put Britain’s ‘twin second cities’ at the heart of a new growth strategy. While romantics might think of Britain as a green and pleasant land, in reality, it is a small, heavily urbanised island – in which 70 per cent of the population live in cities and their surrounding areas. These major cities – London, Birmingham, Manchester, Leeds, Liverpool, Glasgow, and Bristol, to name a few – have powered the growth of Britain’s economy for centuries. But they have recently lost their spark. England’s major cities outside London are now far less productive than the national average. Reviving our major cities is the route to stronger growth across the UK – and we should start with our ‘twin second cities’ of Greater Manchester and the Greater Birmingham area, which have a combined population of six million. This revival should start at the (city) centre – enticing in more high-value service sector firms and graduate workers, and then build outwards – with a laser focus on public infrastructure, enabling workers to commute to those city-centre jobs, and a step change in housebuilding to protect against soaring housing costs.

• Invest in our future, don’t live off our past. Boosting growth in Britain’s cities – and linking them to nearby towns and other areas – will require major public investment. But in Britain, long-term infrastructure planning too often loses out to short-term spending pressures, with the quality of public services suffering as a result. We need to encourage more public investment by boosting national saving and protecting against the year-to-year chopping and changing of budgets. This will help investment in the economy rise to – and critically, stay at – 3 per cent of GDP.

• Ensure there is good work in every town. In the world of work, we should build on Britain’s success with the minimum wage, while addressing the lack of security, flexibility, and control in low-paid work that high earners take for granted. Over the past 25 years, a fast-rising minimum wage has boosted pay in lower-earning parts of the country. It’s time to raise minimum employment standards too – from better sick pay to more notice of shifts and a right to regular contracted hours, so that everyone can enjoy the conditions that white-collar workers take for granted. Raising employment standards would help ensure decent work throughout the country – even in lower-paying areas, where housing and the wider cost of living are often cheaper too.

• Rising prosperity should benefit everyone. Although productivity growth is a precondition for Britain to return to steady gains in living standards, growth alone would boost market incomes (such as wages, dividends, or rental income) and increase inequality from the UK’s already high levels. That is because a large share of the population draws at least some of their income from outside the labour market, via the State Pension or Universal Credit. We cannot afford to leave these families behind. That was the mistake Britain made in the 1980s, when the link between wages and the state pension was severed and caused pensioner poverty to soar. Looking ahead, we need to link social security benefit growth to wages, rather than prices, so that everyone can gain from future prosperity.

The Economy: Down but Not Out

15 years of under-performance for the economy since the financial crisis – which has resulted in average annual wages being almost £14,000 lower than they otherwise would have been – is hugely dispiriting. But we shouldn’t be fatalistic about Britain’s economic prospects. There is a positive flipside to this under-performance – Britain has huge amounts of catch-up potential.

To see how much, let’s consider five other advanced economies that we consider peers – France, Germany, the Netherlands, Canada, and Australia. All now outperform us. But were the UK to catch up and match the average income and inequality levels of these countries over the next decade – a far from impossible task – then the typical family would be a third better off – seeing their incomes rise by more than £8,000 a year.

The prize for a successful new economic strategy is huge and should be the central goal for whoever steps into No. 11 Downing Street after the General Election.

This is just one of the articles that features in the new edition of Chamber’s parliamentary pre-election journal. To gain access please visit: www.chamberuk.com/newsletter