The English Economic Muddle
The English Economic Muddle
The UK economy lags America’s poorest state, and the IMF says it’s going to get much worse.
If you really want to start an argument with a Labour politician, just ask them why Britain is now poorer than the poorest state in America, Mississippi.
“Nonsense,” they would say. “That is a right-wing trope debunked by fact-checks.” Crude comparisons, they’d insist, ignore social transfers and how much Americans spend on health without the beneficence of the NHS.
They would be wrong. In terms of GDP per head—i.e. wealth creation—Britain has indeed been falling behind America’s poorest state: €49,780 against €48,411 in 2024.
Even by the International Monetary Fund’s Purchasing Power Parity standards, Mississippi is still above the UK. And this was the case before the war in Iran and the closure of the Strait of Hormuz: Britain has been lagging behind America’s poorest state for years. And it is about to get a lot worse.
The International Monetary Fund reported this week that Britain faces the biggest economic shock in the G7 of industrialized countries. The world’s leading financial forecaster thinks that, in the coming years, Britain will have the highest inflation and one of the smallest increases in living standards in the world. This year the Brits will get £600 poorer because of increases in food, petrol, and household gas. There is even talk of food shortages.
This is not good news. Living standards have been essentially stagnant in the UK since the 2008 financial crash—the longest wage freeze since the Napoleonic Wars. Burdened with welfare costs that dwarf income tax receipts, and a debt pile of $3 trillion, the UK is in a spiral of decline.
Of course, the IMF can get things wrong. It often fails to predict growth rates and is constantly revising its figures. Last month saw a surprise uptick in UK GDP. Supporters of Brexit say the IMF got the impact of the UK leaving the European Union wrong: Growth in the UK since 2016 has been comparable with EU countries like Germany.
But this is cold comfort. The European Union has itself been lagging far behind the US as it tries to cope with the consequences of its growth-killing energy policies. The Bank of England, crucially, believes the IMF and is already changing policy on interest rates as a result of its forecasts.
Just weeks ago, analysts were expecting the Bank to continue cutting interest rates to try to boost growth. Financial markets now believe the Bank of England’s Monetary Policy Committee will increase the base rate from 3.75 percent to 4.5 percent in the next six months. These forecasts themselves indicate that a recessionary mentality is taking root in the UK.
Britain already has the highest borrowing costs in the G7 even before global investors start pricing in the forthcoming inflation shock. The independent Office for Budget Responsibility estimates that a one percentage point increase in base rates will cost the UK government more than £10 billion in the next four years.
But that is a conservative estimate. It doesn’t take account of the UK government’s penchant for ramping up spending and borrowing while taxing the life out of businesses. Labour entered government promising to stick to all manner of responsible fiscal rules and growth policies. In the event, it has followed the course of all previous Labour governments. As the old political saying goes: Dogs bark, cats meow, and Labour puts up taxes. Over £80 billion in less than two years.
The UK Labour government has been in hock to the public sector unions and has been awarding workers above-inflation pay rises. Resident doctors have had a pay hike of nearly 30 percent over the last two years—and yet are striking for more.
The ailing National Health Service’s productivity is still way below pre-pandemic levels, despite many billions of investment from the previous Tory government and Keir Starmer’s. The NHS now consumes nearly half of all day-to-day departmental spending. That is extra to the welfare bill and pensions bill.
But the real problem, and one the IMF also addresses, is energy. The UK has some of the highest energy prices in the world. British industry pays three to four times what American firms pay for electricity. This is unsustainable.
Pharmaceutical firms like AstraZeneca and Eli Lilly have paused or cancelled £2 billion in planned investments, according to the BBC. OpenAI last week shelved its “Stargate UK” data center because of high energy costs and stifling regulation.
Red tape is also a huge problem in the UK. The cost of the UK’s landmark investment, the HS2 fast rail service, has ballooned from £31 billion to nearly £100 billion and is a decade behind schedule. The project became the butt of much wry humor when it was revealed that over £100 million was spent on a bat corridor to prevent Bechstein’s flying rodents colliding with trains. The UK’s Hinkley Point C nuclear power station is also massively delayed and over budget, not least because of £700 million spent on protecting a handful of fish.
Prime Minister Keir Starmer is fully aware of Britain’s regulatory insanity but seems unable to do anything about it. Britain’s anti-growth regime has built up over years. It is a result of the accretion of laws passed unthinkingly by successive governments on issues like health and safety, protecting the environment, reducing traffic and, of course, promoting race and gender equality. The road to hell is paved with good intentions.
Similarly, the road to prosperity is paved with cheap energy. Britain’s energy crisis is a legacy of successive governments’ attempts to make net zero commitments legally binding. The UK Supreme Court ruled last year that development of the Jackdaw and Rosebank oil fields off Scotland’s coast would be incompatible with the government’s climate laws.
Well, change them, you might say—and you would be right. The UK Energy Secretary Ed Miliband could force through drilling in these fields, but has so far refused on the grounds that it would be “climate vandalism.” The result is that Britain is importing tens of billions of pounds worth of liquefied natural gas from countries like America in preference to developing its own energy resources. British politicians are morally naive and economically illiterate.
Mississippi also claims to be sound on the environment, especially restoring habitats and preserving the ecosystem of the Delta region. Sixty-five percent of the state is forested, and the forest is regarded as a precious resource. But somehow, Mississippi manages to industrialize as well, even as it is still dogged by a legacy of chronic poverty and low life expectancy. However, ’Ssippians can at least hold their heads high when they encounter visitors from their former colonial overlords. The UK is going nowhere but down, led by an elite obsessed with cultural issues who seem to regard declinism as morally preferable to capitalism.
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