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Britain Is Much Worse Off Than It Understands

February 3, 2023
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Britain Is Much Worse Off Than It Understands
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By any criteria, the United Kingdom faces a serious economic and social crisis, one that will deepen without big shifts in policy. Yet there is little sense of this crisis among the country’s elite, not least its politicians.

The power of narratives helps explain this disconnect. The gap between the U.K.’s reality as portrayed by the dominant narrative of its economy’s performance and real life as experienced by its average citizen has widened to the breaking point. The resulting political distortions are now making the underlying problems even worse.

Narratives and the emotional impulses that drive them play an underappreciated role in our understanding of the way economies work and whether they are perceived to be performing well or not. Sometimes, there is real grounding to those narratives; other times, they are largely fictional constructs. This does not necessarily mean that those who believe them and propagate them are dishonest, only that their personal experience may not be representative of the economy as a whole.

By any criteria, the United Kingdom faces a serious economic and social crisis, one that will deepen without big shifts in policy. Yet there is little sense of this crisis among the country’s elite, not least its politicians.

The power of narratives helps explain this disconnect. The gap between the U.K.’s reality as portrayed by the dominant narrative of its economy’s performance and real life as experienced by its average citizen has widened to the breaking point. The resulting political distortions are now making the underlying problems even worse.

Narratives and the emotional impulses that drive them play an underappreciated role in our understanding of the way economies work and whether they are perceived to be performing well or not. Sometimes, there is real grounding to those narratives; other times, they are largely fictional constructs. This does not necessarily mean that those who believe them and propagate them are dishonest, only that their personal experience may not be representative of the economy as a whole.

The 1970s in the U.K. are widely portrayed as a decade of economic stagnation and political strife, which only came to an end with a paradigm shift in economic policymaking at the end of the decade. According to the dominant narrative, this opened the way for a successful drive to curb the power of special interest groups, such as organized labor, sound macroeconomic policies, and much improved economic performance. The 1970s are seen as a failed decade and the 1980s as one of renaissance—the benefits of which last until today.

Although there is no doubting the scale of the economic challenges faced by the United Kingdom in the 1970s, not least those brought on by the oil crisis and very confrontational labor relations, popular perceptions of the 1970s and 1980s draw more on fictional creations than reality.

Across developed economies, the 1970s was not a worse decade than the 1980s in terms of growth, productivity, and living standards. Even in the U.K., which was forced to borrow money from the International Monetary Fund (IMF) in 1976, growth rates stacked up better in the 1970s than the 1980s, averaging 3.38 percent per year against 3.0 percent. The country ran a substantial trade deficit at the height of the so-called Barber Boom—named after the Conservative then-Chancellor Anthony Barber—but then surpluses for much of the rest of the decade. By contrast, the U.K. was running record trade deficits of almost 5 percent of GDP by 1989.

Yet British politicians, and not just Conservative ones, still talk about the risk of a return to the 1970s, as if that decade was the nadir of U.K. economic performance. There is still a tendency to raise the specter of a return to 1970s as a warning. There is little sense that the current crisis is comparable with the 1970s, let alone worse. On the face of it, this is odd.

Although the U.K. was a relative growth laggard during the 1970s, this was nothing in comparison to today’s current collapse in living standards. Average U.K. real wages are now lower than 18 years ago, which is unprecedented in the country’s peacetime economic history.

On most measures, the country has the most limited welfare state of any developed country, including the United States, with the result being that working households are shouldering more risk than their peers and—as the Resolution Foundation recently found—today’s young Britons face paying far more in tax than they will ever receive back in terms of pensions and other benefits. The reverse is true of older cohorts.

There is also an unprecedented housing crisis, with young people increasingly excluded from home ownership if they cannot access family wealth. Public services are under unprecedented pressure, especially health care. Excess deaths have risen while Britain is the only country in Europe suffering from declining life expectancy.

The U.K. is also running a large, structural trade deficit. Were its economy growing rapidly, driven by high rates of capital investment, this would be less of a concern. However, it is not. Britain faces a deepening economic growth crisis, not least because business investment is running at the lowest level in the G-7. The trade deficit matters: The trajectory is unsustainable, implying as it does a rapid increase in liabilities to the rest of the world.

If the U.K.’s economic performance is so poor, why are comparisons with the 1970s considered outlandish? Narratives are often crafted by those who have profited from the changes, especially if those winners are powerful people in politics and media. The policy shifts in the late 1970s and early 1980s benefited particular groups within society—the better off, primarily—leading to a steep rise in inequality. The United Kingdom remains one of the most unequal developed countries to this day, according to the Equality Trust.

In a very unequal society, people with the influence to sustain narratives tend to be insulated from what is happening to most of the population. Many individuals genuinely think the country’s economic situation is better than it is because their personal circumstances are strong. They are among the higher earners and have wealth to cushion themselves against risk. In the U.K., they also tend to have generous private pensions and usually bought their houses before prices rose dramatically relative to earnings.

Second, there is an abiding belief that the U.K. must be performing well because it is run how an economy should be run according to the dominant narrative—that is, with a small state, limited welfare benefits to provide the right incentives, and relatively low taxes on high incomes and wealth to encourage risk-taking and hence economic growth. This encourages denial about the scale of the country’s underperformance or a tendency to scapegoat others for it—be it the poor for being lazy or immigrants for consuming public services and scarce housing.

In reality, there is plenty of evidence—not least from the IMF—that high levels of inequality are bad for economic growth, that a bare bones welfare state makes it hard for people to take risks and hence holds back social mobility and productivity growth, and that the underfunding of public goods—in particular health care, education, and infrastructure—hurts economic growth potential. There is certainly no correlation between the size of a country’s state and its economic performance. However, a narrative can be seductive if it legitimizes a system people personally benefit from.

The third reason is that the U.K.’s political class is loath to admit the scale of the problem because to do so would mean calling into question Brexit, which neither of the main political parties is willing to do—the Conservative Party because many of its politicians and a majority of its voters continue to believe in Brexit and the Labour Party because it fears losing the votes of Brexit supporters in close fought parliamentary seats in England’s midlands and north. This leads the country’s politicians to downplay the scale of the problems and ignore policies—such as rejoining the European Union’s single market—that could alleviate them.

The bigger the gap between the dominant narrative and reality experienced by most people, the greater the political risk. A government needs to be honest about the challenges a country faces and put in place long-term strategies to address them. Voters do not expect miracles, but they need to feel confident that things are moving in the right direction. If not, the way is open for social unrest, a loss of respect for political institutions, and growing ungovernability.

The post Britain Is Much Worse Off Than It Understands appeared first on Foreign Policy.

Tags: BritainEconomicsEuropeHistory
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