Is the UK Really “The Sick Man Of Europe”?

14 mins. to read
Is the UK Really “The Sick Man Of Europe”?

The New Narrative

Sir Keir Starmer’s response to Jeremy Hunt’s Budget statement on 15 March was interesting, in that he articulated a critique of government policy which is gaining traction. The narrative is that after 13 years of Tory rule, the UK has been reduced in stature and its economy crippled. Actually, the first five years – 2010-15 – were in coalition with the Liberal Democrats, which is often conveniently forgotten.

Starmer accused the Tories of using the war in Ukraine as “a blanket excuse for failure”. He said that the “hopelessly divided” government had put the country on a path of “managed decline” and that the chancellor was guilty of “dressing up stagnation as stability”. He added that “endless fighting on tax” among the Conservatives was “bad for growth”. “Real stability means that taxes don’t go up and down like yo-yos”, he ventured. The Tories were “caught between the rock of decline and the hard place of their own economic recklessness”.

The substance of Labour’s onslaught was that the UK has been hit harder than our peers by recent macroeconomic crises, such as the massive hike in gas prices, because our economy has “a weak foundation”. Wages in the UK in real terms are now lower than they were in 2010, yet the average family in neighbouring France is about one tenth better off than 13 years ago and the Germans are almost one fifth richer. “We are the sick man of Europe once again”, said Starmer.

The term ‘the sick man of Europe’ was indeed applied to the UK in the 1970s during a period of rampant inflation, widespread industrial unrest, low productivity and anaemic growth – not unlike the present. That decade ended with the election of Margaret Thatcher in May 1979 with a mission to turn the UK around. Whatever some people may think about Thatcher’s legacy, it is undeniable that the 1970s − a decade when living standards were falling or stagnant − were followed by the 1980s – a decade when living standards rose significantly, even if wealth and income inequality accelerated during her premiership.

Starmer is right to claim that living standards in the UK have lagged behind those of other industrialised countries since the financial crisis of 2008-09. Moreover, the Office for Budget Responsibility (OBR) is predicting that real incomes per person will still be below pre-pandemic levels in 2027-28. So, by 2028, British people will have experienced hardly any increase in their living standards for 20 years. In such a stagnant economy, talented and ambitious people move elsewhere. Just as there was a “brain drain” in the 1970s, so there is already evidence again that professional people are leaving the UK. Right now, Hunt’s promise to make the UK one of the “most prosperous nations in the world” looks hollow.

Jumana Saleheen, chief economist at Vanguard Europe, said in the Financial Times last weekend that the UK has experienced stagnation in living standards over the last 15 years on three key metrics: household incomes, gross domestic product (GDP) per capita and real wages.

Average UK real household income is broadly unchanged since 2007 – just before the financial crisis – according to data from the Office for National Statistics (ONS). Household incomes across the 34 OECD countries increased by an average of 20 percent between Q1 2007 and Q3 2022. But for the UK the increase was just six percent.

The principal reason is that the UK’s economic growth and productivity growth have been feeble since the financial crisis. Productivity, measured as the value of output per hour worked, has stopped growing, though the reasons for this are debated. One is that the financial-services industry contracted after the banking crisis for many reasons, which I’d like to unpack soon. Another is that, since the Brexit referendum in June 2016, foreign investment has nosedived. France now accounts for more inward investment than the UK; furthermore, the Paris stock market is now considerably bigger than the London market.

As at the end of last year, GDP per capita across the OECD in nominal terms ranged from $127,673 in Luxembourg to $10,948 in Mexico. The UK ranked 16th out of 34 with a GDP of $47,318 – still ahead of France and Japan.

UK wages adjusted for inflation, having risen 23 percent in the eight years 2000-2008, fell by five percent over the following eight years, according to the ONS. Clearly, whether by dint of good management or good fortune, the Blair years were benevolent, and the UK was able to make up ground with France and Germany in terms of productivity. That was the first decade of globalisation when western markets were opened up to abundant cheap goods flowing out of China and other emerging economies such as Vietnam’s. I have written previously about what I call the “Primark effect” – the days when one could buy a fleece or a pair of socks manufactured in a factory in Asia, for a pound.

By 2021, UK real wages were up by just four percent from 2007, putting the UK in 28th position out of the 34 OECD countries in terms of earnings growth. That compares with a 20 percent real increase in wages in the US and a 16 percent rise in Germany. Starmer’s “one fifth” reference suggested that the German figure was 20 percent, so he is guilty of a minor inaccuracy there – though the point still stands. Labour also made errors in its calculations regarding the tax benefits to the better-off from the abolition of the lifetime allowance – but let’s not nitpick.

Even more concerning is that less well-off households in the UK have fared the worst. Low-income households in the UK are now 22 percent poorer than their counterparts in France, according to a study by the Resolution Foundation.

Life Expectancy

There is growing evidence that life expectancy – always loosely correlated with incomes – is falling amongst the least well-off too. For people living in England’s most deprived areas, average life expectancy, from 2011 to 2020, fell by eight months for women and five months for men.

Economists regard life expectancy – and the trend in life expectancy – as a key metric of economic well-being. It is also the metric according to which governments set the age at which citizens become eligible for the state retirement pension.

The state pension age in the UK is currently 66 but will rise to 67 between 2026 and 2028. It was expected to rise to 68 by the late 2030s or early 2040s, but it is understood that the chancellor hoped to bring this forward, as recommended by an independent review in 2017. This week, with new data suggesting that increasing life expectancy in the UK has stalled, it was rumoured that any decision to bring forward the increase in pensionable age had been postponed until after the next general election. The last thing governments wish to do is to upset people in their 50s, who are often swing voters, just before a general election.

Seventy years ago, the UK ranked seventh in the world in terms of life expectancy, behind countries such as Norway, Sweden and Denmark. But by 2021, the UK was ranked 29th, falling behind Australia, Italy, Japan, Canada, Israel and others, according to an analysis by the Journal of the Royal Society of Medicine. A Briton born in 2021 could expect to live for 80.7 years on average. This is 5.2 years less than someone born in Monaco, the country ranked at the top of the list.

Academics at Oxford University and the London School of Hygiene & Tropical Medicine compared the UK’s recent ranking with 1952, when the average life expectancy was just 69.5 years. While the expected lifespan has increased significantly, the UK has been overtaken by many other nations in this league. Japan, for example, has gone from 45th place to rank in the top three. Professor Martin McKee, a co-author of the study, believes that income inequality, which accelerated under Thatcher’s premiership, is an important reason for the relative decline in life expectancy in the UK compared to the rest of the world. The report emphasises the statistic that the UK is the second most economically unequal country in Europe.

Another reason why Japan has gone up the life-expectancy league while we have gone down is very probably the quality of diet – something closely correlated with prosperity. Almost everyone agrees that obesity is a public-health issue in the UK, though there is disagreement about whether it is the task of the state to tell people what and how to eat.

This week, Henry Dimbleby, the “food tsar” who was author of the National Food Strategy commissioned by Michael Gove, resigned as an advisor to the Department of Environment, Food and Rural Affairs (DEFRA). In a statement, he referenced comments made by the Bank of England’s former chief economist Andy Haldane, who recently described the worsening health of the British people as the biggest threat to economic growth. He added: “The sad thing is there a grand tradition of Tory intervention on public health. It was Winston Churchill who said the greatest asset a nation can have is the health of the citizens…I’m very pessimistic, I just don’t think they get it.”

Lengthening waiting lists in the NHS are another brake on rising life expectancy. The NHS was not the only public-health system that experienced painful bottlenecks over the winter just passed. Health-care systems right across Europe, ravaged over three years by coronavirus, have struggled with a triple pandemic of Covid, seasonal flu and syncytial virus (RSV). Nor was the NHS the only health-care system to experience strikes – Spanish doctors went on strike too.

Ageing populations and staff shortages are hitting health-care systems in most EU countries. The proportion of people aged 65 or older is now 20.4 percent in the EU. Social care is an issue in nearly all advanced countries – though in much of southern Europe, as in Asia, care for the elderly is very widely still provided within the family. I for one was disappointed that, while there was provision for free childcare in Hunt’s Budget, there was nothing for in-family carers. And ‘granny flats’ are still subject to a separate council-tax bill. This must urgently be revisited.

UK-US: A Comparison

Comparison between the UK and the US reveals a stark difference in momentum. On the eve of the financial crisis, the average British family was 23 percent poorer than its American counterpart. That gap has now widened to 37 percent. In 2021, the typical American household enjoyed an annual income of £51,500 while the typical British household earned just £34,000.

Moreover, personal taxes are higher in the UK than in the US. A British person earning over £50,000 faces a marginal tax rate of 42 percent on each additional pound earned. A US worker doesn’t face a marginal tax rate of that order until they earn over £190,000. It is true that US families have to pay for medical insurance, which can be considerable, out of their disposable incomes, whereas most British families can use the supposedly ‘free’ NHS. But there is not much doubt about who receives prompter and usually better treatment. This is reflected in higher rates of cancer survival in the US relative to the UK – an important phenomenon that I will examine here soon.

Then there is the fact that energy costs are much lower in the US than in the UK. A litre of gasoline (petrol) costs about $1 (82 pence) this month at the pump across the US, while this week a litre of unleaded petrol on British supermarket forecourts was retailing at around £1.45.

Faulty Fiscal Policy

Most commentators with a pro-market bias think that by raising corporation tax from 19 percent to 25 percent, even given the provision for “full expensing”, (which I discussed last week), will disincentivise new business investment. That will lead to shrinkage in the economy over time and to lower wages, since workers bear roughly half of the cost of business taxation in wage rises foregone. Workers will also be paying higher taxes out of their gross wages as tax thresholds have been frozen.

In any case, “full expensing” is just another tax distortion. It entails that firms which lease machinery fare worse than those which buy identical machinery. Or that a firm which buys second-hand machinery (and we are all in favour of “Reduce-Reuse-Recycle”, aren’t we?) is treated less favourably than one which buys new. This complicates the lease-or-buy decision unnecessarily, and possibly damages the environment.

Let us recall that Rishi Sunak, when Boris Johnson’s chancellor, raised the rate of national-insurance contributions by 1.25 percent, supposedly to pay for the cost of “social care” aka care for the frail and elderly. We don’t seem to have heard much about social care of late, except that I note that most county councils in England have added a “cost of social care precept” to council-tax bills for the forthcoming new tax year. So, we are paying two forms of additional tax towards the social-care budget, without any perceptible improvement in provision.

Under the 2017 Tax Cuts and Jobs Act, advanced by the Trump administration, the federal government lowered the headline corporate tax rate from 35 percent to 21 percent and permitted businesses fully to deduct the cost of investment for new equipment for five years. Between 2017 and the onset of the coronavirus pandemic in March 2020, business investment in the US rose by 10 percent above its pre-2017 average. Corporate tax revenue as a percentage of GDP rose from 1.4 percent to 1.7 percent.

The increase in UK corporation tax in last week’s Budget was entirely political. Sunak campaigned on that podium against Liz Truss in the ill-fated Tory leadership election which wasted over two months of precious time last summer. To have cancelled the tax hike would have looked like a concession to the now humbled ‘Trussites’.

The ‘Old Lady of Threadneedle Street’ Swings Her Handbag

Inflation can be self-perpetuating. If people believe that inflation will persist at high levels, they will seek wage rises which further stoke inflation. On Wednesday morning, contrary to expectations, we learnt that annual inflation in the UK in February was up on the previous month to 10.4 percent (not including housing costs).

This was largely driven by soaring price rises in restaurants and cafes, hotels, food, non-alcoholic beverages, clothing and footwear. Food prices overall were up by an eye-watering 18 percent year-on-year. Rationing of fruit and vegetables by many supermarkets in February due to weather-related shortages of tomatoes, brassicas, peppers, eggs and other staples pushed prices higher. I should add that the vegetable shortages were exacerbated because the government did not extend the energy-price guarantee to the horticultural industry, so producers under glass like Thanet Earth in east Kent found that production became uneconomic.

People have to eat, so expenditure on food is not discretionary, as is spending on, say, holidays. Food prices are rising faster even than energy prices, which has the potential to cause real hardship.

Sharon Graham, the general secretary of Unite, one of the largest trade unions, said in reaction to the news: “Unite’s ongoing fight to win better jobs, pay and conditions continues.” Despite the good news of a pay settlement for NHS workers and the prospective end to the rail strikes, industrial unrest is likely to continue for as long as price rises outstrip pay rises. The national living wage (aka the “minimum wage”) will rise across the UK on 1 April from £9.50 per hour to £10.42 – a rise of 9.7 percent.

The news made a further increase in rates by the Bank of England’s Monetary Policy Committee (MPC) on Thursday 23 March all but certain. The pound edged up in anticipation. In the event, the hike of 25 basis points in UK rates to 4.25 percent was in line with expectations and followed an identical increase by the Federal Reserve on Wednesday to 4.75-5.00 percent. That was despite the fragility of the international banking system, as evidenced by the collapse of Silicon Valley Bank and the unceremonious ‘shotgun marriage’ of UBS and Credit Suisse last week.

The latest inflation spike is likely to cast doubt over the OBR’s prediction that inflation will fall to 2.9 percent at the end of this year. And the fear that rates may need to rise yet further has pushed up UK gilt yields already. On Wednesday afternoon, the 10-year gilt yield was up by 16 basis points to 3.525 percent, though it eased slightly on Thursday. That portends rising government borrowing costs, putting further strain on public finances.

I’m not sure if the soubriquet “sick man of Europe” is helpful. It does not diagnose the nature of the sickness nor prescribe the treatment by which it might be cured. For sure, other advanced countries are feeling queasy too. I’m off to Paris this evening, where I have been advised to bring a gas mask to withstand the pong resulting from the prolonged dustbin workers’ strike and the wafts of CS gas unleashed by riot police.

But if we are, as a nation, to continue to play in the global premier league, we will have to raise our game. And sharpish.

Comments (14)

  • Pete jones says:

    Interesting article, very informative. It reinforces my view that the Tories need booting out asap

  • Andy says:

    I take it that is so the oncoming Labour Government can trash the UK economy again like they did in the late 70s and the 2000s.
    Victor, I wish someone could investigate the cladding issues that affected a lot of inner city councils ( 93% Labour controlled).
    The planners who passed these contracts to these firms, many of which quickly became bankrupt, need investigating to see if it was “jobs for the boys “. There is a 23 year old planner 35 miles away from Manchester that has just bought his 3rd house. I wonder how many more planners received certain benefits during the issuing of those unfit contracts. Unfortunately , people seem to be too scared to ask

  • Dobie says:

    Great article 👌🏽

  • Campbell Dunn says:

    Interesting read, Britain we have more laws, tax legislation, rules , committees, investigations, etc and this before we add the complete lack of integrity amongst many in positions of trust.
    Without testing, measuring , accountability and comparing with the best. The results are evident as we slip further downward in the spiral of decline.

  • Richard Green says:

    Andy – there are channels to investigate such things, maybe start by bringing it to the notice opposition Councillors.

  • Ken Slow says:

    Long on analysis, short on ideas for improvement.

  • A Reader says:

    Why are you not on Substack?

  • Chuck Ponzi says:

    ,A view from across the pond,… One wonders if what many in my country call, “da gubermint,” really has the power to impact the economy that is purported in the article. Absent Dame Thatcher who handbagged the UK out of its “‘I’m all right Jack” mentality of the Labor years no political party has demonstrably altered the course of the UK.

    In my country the inability of politicians to alter the course of the Ship of State has ben demonstrated by Mr. MAGA Donald Trump. His signature success was to make wearing beanie caps great again.

  • Greg Potter says:

    Life is imitating art – in this case the UK is the real life version of The Hitchhikers Guide – run by telephone sanitisers 2nd & 3rd class, with pounds substituted for leaves, in endless supply, by witless fools who wonder why they are now worthless and there is a huge inflation problem. The same fools now pursue green energy grandstanding (originated by the now leader of the Lib Dems) that ensures the population and economy are voluntarily impoverished by importing LNG at sky high prices from half way across the globe, with an adverse climate impact over four times what it would be extracting it from the North Sea, all enthusiastically backed by morons hanging off motorway bridges, causing traffic jams and yet more pollution. You could hardly make it up. There is no party other than Reform (God help us) that even has the slightest inkling about the realities of their zero carbon commitments and how to deal with it. Keep on taxing investments in green energy and North Sea exploration, that’ll help no end.

  • Lawman says:

    A thorough and damning analysis. Can Mr Hill please write about how we can change this, even though it will take 10 years. He is one of the few who would not make unqualified suggestions such as ‘improve productivity,’ ‘’reform the NHS & public procurement’, ‘reduce regulation’ and ‘reverse Brexit’.

  • Graham says:

    The key is productivity.
    Are we less educated and on average less efficient over the the last 20 years?
    The ONS notes that 4.7 million residents were born abroad in the year 2000 , rising to 8.5 million in 2015.
    Are new migrants less skilled and less productive?
    If this is not the case, then how have we become so inefficient in a short space of time?

  • M Crabb says:

    And indeed, how much down to Brexit, of which I recall you were an enthusiastic proponent?

  • Renew says:

    People like to refer to thatcher’s economic miracle but seldom mention the black gold that became available at the perfect time for her reign.likewise the fall in productivity after 2010 is rarely linked to the massive increase in low paid immigrants championed by Blair brown and mandleson during the noughties.

  • Joe says:

    Considering the numbers show since 2007….. why are you moronincally harking on about something that only happened last year? Ffs if you fail to have any analytical ability I suggest you dump all your cash in a wooden box before setting it alight with petrol then blame the wood.

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