The productivity landscape in the UK has experienced a significant downturn over the last twenty years, with new research highlighting a troubling gap compared to both the United States and European counterparts. This analysis features in the latest review of the chancellor’s fiscal policies.
Research conducted by Citi, published by the Institute for Fiscal Studies (IFS) as part of its annual green budget, reveals that growth in output per worker in the UK has reached its lowest rate since at least 1850, during the early Victorian era.
Currently, UK output lags 36 percent behind where it could have been if the country maintained the growth trend that characterized the period from 1997 to 2008.
This situation stands in stark contrast to the US, which is 24 percent off its expected trajectory, and the eurozone, which is 31 percent below, despite both regions facing economic challenges similar to those of the UK.
The IFS/Citi report described the UK’s economic performance as a clear outcome of policy failures, asserting that the engines of innovation within the UK economy appear to have stalled. It pointed to a notable decrease in the number of high-growth small businesses that possess the potential to become industry leaders.
In 2014, nearly 6 percent of UK firms (approximately 14,000) were categorized as high-growth companies, defined by their ability to increase their workforce by more than 20 percent annually for three consecutive years. This percentage has now dwindled to under 4 percent, marking an alarming trend.
The report characterized Britain’s economic performance as deeply concerning, stating, “Trend UK productivity growth has fallen to near-record lows.” The challenges were exacerbated during the COVID-19 pandemic, with the UK’s GDP still trailing 6.1 percent behind pre-pandemic levels, contrasted with a 4.3 percent shortfall in the euro area, according to the IFS.
This state of underperformance serves as a crucial warning. If such lackluster performance persists, reversing the trend could become increasingly difficult, leading to uncertain institutional implications. Additionally, the report suggests that the global economic and financial landscape may be becoming less favorable.
Nonetheless, there are indications of potential improvement. The IFS forecasts a rebound in UK economic growth, predicting an acceleration in 2026 and 2027 as monetary and fiscal policies become more accommodating.
After years of stagnation, where productivity growth has nearly flatlined, there is room for recovery. Concerns remain, however, regarding the Bank of England’s responsiveness in lowering interest rates, as it still exhibits a cautious approach to inflation. While the focus on inflation risks is deemed justifiable, the report calls this perspective increasingly unsuitable given the evolving economic situation.
“The balance of risks has materially shifted. Supply chain disruptions are diminishing. Fiscal policies are changing direction. Inflationary pressures are decreasing. Meanwhile, the labor market shows signs of growing vulnerability,” the report concluded.