UK urged to use ‘superpower’ strength in services to boost living standards

Unlock the Editor’s Digest for free

UK living standards have fallen far behind a group of five peer countries following a decade and a half of paltry growth, leaving typical households facing an annual £8,300 gap that will only be narrowed with a radical shift in policy, according to research by the Centre for Economic Performance and the Resolution Foundation think-tanks. 

The country needs to capitalise on its strengths as a “superpower” in services sectors such as education, banking, the arts, and architecture as part of its effort to address the gulf in living standards with Germany, France the Netherlands, Canada and Australia, they argue.

Tackling the UK’s “toxic combination” of low growth and high inequality would also require the country to address its status as the G7’s investment laggard, they said in a report published on Monday that concludes the think tanks’ Economy 2030 Inquiry, a project funded by the Nuffield Foundation. 

The authors added that if UK business investment had reached the average level of the US, Germany and France since 2008, its gross domestic product would be almost 4 per cent higher, lifting wages by approximately £1,250 a year.

“For decades, the UK has felt the effects of high inequality, hindered growth and economic stagnation,” said Stephen Machin, professor of economics at the London School of Economics and director of the Centre for Economic Performance. “But this can change.”

Chancellor Jeremy Hunt in last month’s Autumn Statement claimed the government’s plan for the economy was paying off, as he unveiled tax cuts and regulatory reforms that he said would “remove barriers to investment”.

But the announcement was accompanied by a downgrade in the UK budget watchdog’s estimate of the country’s potential growth. 

UK labour productivity increased by 0.4 per cent a year in the 12 years following the financial crisis, half the rate of the 25 richest OECD countries. The productivity gap with the US, Germany and France has doubled to 18 per cent since 2008, according to the report.

Meanwhile, income inequality is higher than any other large European country and has persisted despite increases in the national minimum wage.

If the UK managed to close its average income gap and reduce inequality to the levels of the peer group of five countries the typical household would be 25 per cent, or £8,300, better off, according to the report’s findings. The poorest households would be in line for income gains of 37 per cent. 

But the report said that addressing the UK’s problems would require a multi-faceted strategy that builds on its economic strengths. Among those are the country’s status as the second-largest exporter of services in the world after the US.

The report recommended that Britain should strike services trade agreements with countries including Singapore, Australia, Canada, Switzerland and Japan while boosting services activity domestically in cities outside London — especially Birmingham and Manchester.

It also said that the UK country needed to find ways of bolstering higher-productivity areas, such as chemicals and transport manufacturing, that are reliant on integrated European supply chains and are under threat following Brexit.

The report also advocated changes to the policy framework to increase the ability of policymakers to respond to future downturns, including allowing interest rates to fall below zero and lifting the inflation target to 3 per cent from 2 per cent when the current spell of rapid price growth has subsided. 

“Some might question how achievable a material increase in growth or reduction in inequality is for a relatively small and mature economy like the UK,” the report said. “Such fatalism misjudges the UK’s room for improvement; we have a lot of catch-up potential.” 

A Treasury spokesperson said: “With inflation now falling, we are taking the long-term decisions needed for growth, which is why we have cut national insurance contributions for 29mn working people . . . and [are] backing businesses to invest through the biggest business tax cut in modern British history.”