The UK economy is turning – here’s how to sustain it

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Although it is early days, it does now look as if a cyclical recovery is starting in the UK economy. The best evidence is the recovery in retail sales from its six-year post-Covid slump. Since consumer spending is around 60% of GDP, a consumer recovery is critical to getting GDP rising.

The recovery is also boosted by the tech sector. The so-called ‘Flat White Economy’ – which accounts for a quarter of the turnover measured in the index of services – alone generated 60% of the turnover growth last year. The UK tech sector has burgeoned since Brexit outside the restraints of the EU Digital Services Act, its Digital Markets Act and its AI Act and last year attracted more venture capital than the top three European markets together.

The task now is to make the recovery sustainable, particularly as new technologies (of which AI is only one) are coming on stream. These will transform the worlds of business and work, leaving few jobs unscathed. Technological advances will happen whether we like it or not; the trick is to ensure that the inevitable job losses are more than offset by maximising the job gains in the UK.

Today, my colleagues and I from the Growth Commission put forward our plans to make the UK recovery sustainable. We call for action in seven areas.

Seven ways to sustain UK economic recovery

First, we need to deal with incontinence in central government spending. Local government spending is well under control (possibly too much so) with its headcount now down a third from its peak in 2006; meanwhile both numbers and pay in central government have shot upwards. Over the period since 2006 that local government employment has been falling, central government employment has risen by a half. And pay in the public sector is rising more than twice as fast as in the private sector. The cost of this spending incontinence has been passed on in record high taxes.

Second, we need to scrap the new trade union-driven Employment Rights Act which the experts from the Chartered Institute for Personnel and Development confirm will slash hiring and add to costs. We also need to bring the minimum wage back to the international average relationship with other wages. Inflexible labour markets will prevent most of the new jobs enabled by tech from emerging.

Third, we need to bring down the excess cost of housing which particularly affects young people. In Sadiq Khan’s London, planning and overregulation have meant that housing starts have fallen to their lowest level since the nineteenth century, reducing the supply of housing. Meanwhile, anti-landlord legislation has caused so much property to be withdrawn from the market that in the past three years rents have risen by 23% while house prices have risen by only 3%.

Fourth, the UK faces an energy crisis. We won’t have enough energy to supply the data centres needed for AI – and even if we did, it would be uncompetitively expensive unless we reform policy to make energy cheap and abundant. The policies put forward last week by the Centre for Policy Studies (CapX’s parent organisation), which build on earlier proposals by the Growth Commission and others, would go a long way to solving the problem.

Fifth, uniquely in the advanced world, our graduates fail to take advantage of their skills. The so-called ‘graduate premium’ in the UK, the additional pay for getting a degree, has fallen from 80% to 45%. While proper remuneration in non-graduate jobs is a good thing, much expensive education is being wasted by low-value degrees and a repayment system that traps graduates into low-pay, low-productivity jobs.

Sixth, we need to reform the tax system to reduce the penalty paid for success and encourage the young and talented to stay in the UK. Many taxes in the UK now damage the economy so much that they ultimately lose money – and we could afford to cut others if central government spending were under control. In our paper we put forward five proposed tax changes, including abolishing Inheritance Tax and stamp duties and gradually reducing Capital Gains Tax on long-held assets, all of which are fully affordable if spending is controlled.

Finally, we need to avoid own-goal policies such as an ideologically-driven Brexit reset whose first step is to lock the UK into dynamically aligning with the most anti-growth and anti-innovation EU regulations in the agricultural area. Even accounting for less process for GB to EU exports of agricultural goods, any benefits are overwhelmed by the damage to our own economy, which we have estimated at £15 billion. And if the reset were to bring the tech sector back under Brussels control, the fastest-growing part of the economy would go into reverse.

Keeping a recovery going is hard work. But it can be done, provided the government matches its words with action. And the prize would be higher incomes, lower prices and more jobs. It’s worth going for.

Read the Growth Commission’s Spring Statement briefing, ‘Policies to sustain the cyclical recovery’ here. 

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