What the 1990s were for Japan, the 2010s were for the UK. The “lost decade” was an infamous drawn-out period of stagnation for the Land of the Rising Sun, following the bursting of the asset bubble that left its economy with sluggish growth and declining living standards. The UK has experienced a similarly turgid trajectory after the 2008 financial crisis. Although many similar economies experienced economic lethargy, Britain’s recovery has been particularly slow and painful.
The result is that living standards here have stagnated for nigh on two decades, something not repeated in other countries. According to the National Institute of Economic and Social Research, British workers would be £4,300 a year better off had they lived in the United States following the financial crisis. Its research found that real incomes grew at a slower rate than in Germany, France and Belgium. The chief culprit is income growth, which has been anaemic, allowing other countries to catch up or overtake the UK.
The turgid state of living standards has led economists to question whether the UK still counts as a “rich” country, despite the overall size of the economy. These prospects are underscored by the fact that the economy grew a mere 0.1 per cent in the first quarter of this year, thanks to notable contractions in production and construction. The best that can be said is that the UK did not slide into recession. Although too much should not be read into one quarter — it may well be revised upwards — it is clearly lower than the end of 2024, when growth was 0.4 per cent. The only silver lining is that services performed better than hoped.
• Spring statement 2025 predictions
Since last October’s budget, when taxes were significantly ramped up on businesses, the UK’s economic performance has consistently been below expectations. Now, Rachel Reeves, the chancellor, faces the real and present danger of raising taxes again or cutting spending further come the spring statement on March 26. The £9.9 billion of fiscal headroom has reportedly been erased, meaning she will have to take drastic action to make the books balance. Tax rises would be a major error, risking hampering businesses further or breaking pledges made at the last election.
Ms Reeves’ quandary is exacerbated by the rise in defence spending announced by Sir Keir Starmer in the face of demands from President Trump. By ramping it up to 2.5 per cent from April 2027, the government has responded wisely to Mr Trump’s demands and deepening global instability. Yet this spending cannot come from a magic money tree. Ministers have yet to adequately explain how the extra investment will be paid for. It will be money well spent: the capital investment on defence will have a greater domestic economic impact than current account spending on aid.
Ms Reeves appears to have picked welfare as the target for balancing the books, especially the vast sickness bill. Ms Reeves must resist objections from fellow Labour MPs and cabinet ministers over the impact of cuts. There is scant chance of reviving the economy if it is saddled with a £100 billion sickness benefits bill by the end of the decade. Meanwhile, the government must tackle the thorny challenge of economic inactivity: the millions who have fallen out of the labour market since the pandemic. Sir Charlie Mayfield, former chairman of John Lewis, is expected to conclude his review on the problem soon. When considering Sir Charlie’s recommendations, ministers must strike the balance between providing adequate support for those who need truly need it and the vital need to cut the UK’s crippling welfare bill.
If Ms Reeves wants to avoid one decade of stagnation turning into two, she must be tough on welfare, tough on pruning the public sector and tough on getting Britain back to work. There lies the only route to ending stagnation and boosting living standards. She must ignore the naysayers.
