Just when you think it couldn’t get any worse, the threat of a global trade war has contributed to confidence in the UK economy plummeting to record lows. The IPSOS economic index is running at the lowest level since records began. But, it’s more than just international turmoil; dissatisfaction with the economy has been building for many years. The Institute for Government suggest that we think everything is worse since the pandemic and virtually everything except schools is worse since 2009. The Economist paints a similar picture with voters believing everything has got worse, and top of the list is roads with their innumerable potholes, and hospitals, with near record waiting lists.
The dismal outcomes are related to the dire economic performance since 2009. Underpinning the economic malaise is a slowdown in economic growth and productivity. This is productivity since 2009. The economy has never recovered since the financial crisis of 2009. If the economy had continued on it post-war trend, wages, GDP and productivity would all be significantly higher, giving the economy the funds to address the impoverished public services. However, if you can bear more bad news, the Resolution Foundation suggest that the official productivity figures are actually overstating UK growth. Using more reliable HMRC payroll and tax data, they suggest GDP per head has actually fallen by 0.5% between 2019 and 2024. You would need to go back to the 1930s, to find a similar period of stagnation
Now, it’s not all bad, there is some good news on the economy, but before we get there, recent borrowing figures have again been worse than expected, creating a worrying sense of a fiscal doom loop. Just last March 2024, borrowing was expected to be £87bn, the actual figure has turned out to be £152bn. Government worries about the budget deficit and meeting its borrowing rules have cast a shadow over the economy. The deficit seems stubborn despite higher taxes. Higher NI contributions have impacted job creation, and welfare cuts have contributed towards the fall in consumer confidence. A problem is that the government has passed very unpopular measures, including an inheritance tax on farmers, means testing winter fuel and stricter criteria for personal independence payments. Yet, combined together, they only save £7bn a year, which is really a drop in the ocean. It is the kind of savings that can be wiped out by a slowdown in growth or higher bond yields. The government made a big deal about taking really hard decisions, but they managed to lose a lot of political capital, without any real change to the trajectory of the deficit. The OBR gamely predict economic growth will pick up, but if it proves as disappointing as the past five years, there budget rules will be broken in a few years time. There is a saying in economics that if you get high growth, the deficit will take care of itself. If you focus only on the deficit, it can become self-defeating.
If that is all too much doom and gloom, there is at least some better news for the economy since March. Oil and gas prices have fallen 15%, meaning the dismal March predictions of an uptick in inflation may prove overly pessimistic, despite the threat of tariffs raising some prices. The UK economy is far too dependent on gas prices, but at least when gas prices fall, it provides temporary relief. As a result of lower inflationary pressure, markets are now expecting three to four base rate cuts before the end of the year. Lower interest rates would provide support for households remortgaging, consumers with outstanding debt and importantly could lead to lower interest rate payments for the government. One of the big reasons for unexpectedly high borrowing was the recent rise in bond yields which caused so much extra debt interest payments. But, it still remains to be seen how much bond yields fall as base rates are cut.
However, there is a dark shadow to this silver lining of lower inflation. Lower oil and gas prices reflect market fears of a global recession. hit by unprecedented tariff turmoil. Liberation day and even its edited aftermath, caused the US to see tariffs rise to a level last seen in the 1930s, which was the great depression, unemployment of 20%. The UK is less exposed to US tariff threat than other countries, but its struggling car industry can ill afford higher tariffs. Car production has already fallen significantly since 2017. A real problem for the UK economy is a decline in manufacturing and industrial output. It is almost a second era of deindustrialisation. The highest electric prices in Europe, weak demand and declining competitiveness all play a role. But, even if the UK economy would not too affected by Trump tariffs, a global slowdown would definitely hit a fragile recovery. Ever since 2016, the UK has been hampered by a slowdown in trade. Export of goods have not kept up with the rest of the G7. The new trade frictions from the Brexit deal has hit exports to Europe, even if services are largely unaffected. One argument for Brexit was a free trade deal with the US, but so far it remains out of reach, with US prioritising a deal with South Korea.
But, whilst a trade war may not immediately affect households, the state of local councils is a much more pressing. Cuts to the police in the mid 2010s, led to a fall in number of police officers. This has been replaced with new police officers of less experience. Whatever the reason, there has been a big rise in number of shoplifting incidents. Even if the police were able to press charges, there are big backlogs in the court, and even all cases were cleared, the prison system is already full to overflowing.
One reason for low productivity growth has been a decline in participation rates, with worsening health conditions causing more to be moved into sickness benefits. The UK unemployment rate is quite low at 4.5%. This is a much better than the 1980s, when unemployment averaged close to 10%. But, there is still a big issue of people not working. It is just the classification is different, leaving the labour market completely, rather than unemployed.
Despite higher council tax, 43% of local councils are facing bankruptcy. After winning local elections, Nigel Farage promised a DOGE-style cut in wasteful spending. The problem is that local councils have already had 15 years of painful austerity. The real issue is that councils have a legal requirement to provide special needs education and social care for children and adults. As society ages, spending on social care has soared, squeezing all the other areas of local councils. Housing, services for young people and roads, have already had massive cuts. This is why it’s hard to fix potholes, build affordable housing, when most of the budget is going to social care. As an example, Hampshire county council now spend 83% on social care.
Austerity in these public services also has negative effects for long-term economic growth. Too often, spending priorities have focused on short-termism, and when faced with budget squeezes, it is investment in roads, energy, housing and young people’s education that has faced cuts. Whilst university student numbers have increased in recent years, there has been a decline in students at further eduction institutions, with an additional decline in spending per funding. It includes 6% fall in employer skills investment leading to poor levels of vocational skills, causing problems in the economy.
The government have an ambition to build 1.5 million homes in the next parliament, seen as necessary for trying to reduce housing costs. The motive is understandable given the number of affordable homes has fallen, and the average rent has increased faster than inflation. It is often housing costs which are the biggest drag on living standards, with the UK facing some of the least affordable housing in Europe. But, whilst there is a need to increase supply of housing, especially in high demand areas. It will be difficult as housing building fell in 2024 to just 153,910 homes completed in 2024. It will be hard to get enough momentum to double this annual figure. Builders complain about regulations and the lack of skilled labour, but they are also reluctant to see their profit margins reduced by big increase in supply. In this regard, government plans to ease planning regulations may help, but there is no guarantee houses will be built. Just recently,y a scheme to build homes in Battersea was blocked, despite the scheme having 50% affordable homes. It is rare for schemes with so many affordable homes to be profitable. building high density is a solution to the housing crisis, but in this case, it was vetoed by the local council.
Immigration has been something of a flashpoint with record levels of net migration in recent years, this is forecast to fall, though past forecasts have been unreliable. Net migration has contributed to rising rents, exacerbating the housing crisis, but also has been a net contribution to public finances. Though this net contribution has become smaller since EU migration has been largely replaced by non-EU migration. It is an interesting observation that since 2004, 4.5 million new jobs have been migrants from overseas, and domestic employment has just risen 0.6 million. It shows how the economy has become reliant on migration for employment growth and to a less extent GDP growth. But, at least since 2009, high levels of migration has coincided with a stagnation in median wages.
Certainly the difficulty in building is a big problem for the UK. HS2 has taken 70% of the rail budget, which is a shame as many small-scale, local regionaly rail projects have been quite successful. The UK has some of the worst public transport in Europe, a major stumbling block for towns and cities, like Leeds and Birmingham. To the government’s credit they have tried to increase public sector investment by allowing borrowing for investment, but even with a small uplift in public investment, overall investment is still set to fall in a few years.
Some better news, UK growth did pick up at the start of 2025. Higher pay last year has helped increase household balance sheets, with a rise in the saving ratio. The optimistic scenario is that lower interest rates, could see some confidence to spend return. Despite welfare cuts, the net government budget is slightly expansionary with higher spending on public sector pay and some increase in public investment. Lower inflation and lower interest rates could support this future growth. If you like to see a glass half-full, you could argue that the UK has a lot of catch up potential after years of underperformance. Though I do remember making this argument for the past 15 years to no real effect. And even a few years of decent growth would not necessarily be enough to deliver really noticeable differences to the state of public services
All this doesn’t really get into the long-term impact of a rapidly ageing population. The share of the population over 65 is going to rise significantly, and that is all a bit of a headache for the government which will find it very difficult politically to remove the triple lock guarantee. Perhaps we will be saved by the rise of AI and super-powerful robots, as long as they don’t’ take over. However, rather than small benefit cuts which annoy a large number of people, would the government have been better off raising the retirement age as a way to increase employment levels, and reduce pension spending.
Related
https://www.ft.com/content/61164629-9b9a-472b-aaae-9d850da1291e
https://www.economist.com/britain/2025/05/01/broken-windows-and-pockmarked-roads
https://www.fidelity.co.uk/markets-insights/markets/uk/when-will-interest-rates-fall/
https://ifs.org.uk/articles/latest-trends-further-education-and-sixth-form-spending-england
https://ifs.org.uk/publications/annual-report-education-spending-england-2024-25