Britain's economy is under incredible strain. More than you may realize. Austerity through two successive, extraordinarily expensive and damaging crises, has left the UK with an enormous debt burden.
Compared to our friends here or here, or in fact, in any major advanced economy, national debt in the UK has ballooned the most since Covid. But it's not just borrowing that's an issue. Look at tax revenue as a percentage of GDP.
Basically, the share of the country's output that the government takes to pay for what the public needs. It's almost as high as when what the public most needed were bomb shelters. And in an election year, that's a massive problem for whoever's tasked with writing a new spending plan.
We can't raise taxes, can't really let debt go much higher. And yet, public services are crying out for more money. Britain has appointed as many prime ministers in the last five years as Taylor Swift's released re-recorded studio albums.
Four, to be precise. So the question is, can a new UK government fix the problem its predecessors couldn’t? The next government is inheriting an incredibly difficult legacy.
The burden of taxes on the economy at a 70 year high. Public services are creaking at the seams. Record waiting lists in the National Health Service.
Parts of the justice system have had nearly a halving of the number of courts that are operating. You get the picture, and it's not a pretty one. Some of this is down to government spending during the pandemic, which is bigger than any G7 economy as a share of GDP, bar the US.
We are providing 280 billion pounds to get our country through coronavirus. But here's the thing. Most of that money was borrowed from creditors when interest rates were down around here, at historic lows, and repayments were expected to be relatively manageable.
And they might have been. But then. .
. The Russian assault has begun. The largest invasion of a neighboring country in Europe since World War II.
The invasion triggered an energy crisis, as Europe's access to vital Russian oil and gas was choked by sanctions and trade restrictions. UK households will pay almost triple the price to heat their homes this winter compared with a year ago. We're in the middle of a national emergency.
People are really scared and families don't know if they could warm their homes this winter. The cost of living began to soar and the UK was once again the second most generous with financial support, behind only Italy. Overall, 400 billion pounds or so in additional spending, all of which went into debt, and all of which gave us the biggest increase in debt as a share of our economy, of any G7 economy.
The twin impacts of the pandemic and the energy crisis pushed our inflation rate to new highs, and forced central banks to ramp up the interest rate in an effort to halt it. And if you're lucky enough to own your own home, you may remember that time your mortgage payments went up by hundreds of pounds a month, seemingly overnight. Well, this is why.
But for the UK government, it wasn't repayments for a lovely house, but for hundreds of billions of pounds of national debt. The combination of those two events has increased how much it costs to pay for our debt, from about 40 billion pounds a year to about 100 billion pounds a year. That 60 billion pound increase in spending just on debt interest is equivalent to the entire defense budget.
As a result, we have tens of billions of pounds less to spend on anything else, from health to police to defense. But the extra borrowing on those crises didn't come with faster growth. In fact, the UK economy has barely expanded past pre-pandemic levels.
You can see here only Germany has grown less than the UK in that time, as it was so dependent on cheap Russian gas that it faced an existential crisis when the taps were turned off. Germany is also spending a far lower proportion of its GDP on servicing its debt, though. So the challenge to the new government is how do you pay off a huge pile of debt without raising taxes or borrowing or squeezing public services even harder?
Well, one of the best ways to grow an economy is to make a nation more productive. What happens with improving productivity is that for the same amount of work, you get more out of it. It doesn't mean what many people think it means, which is just that you have to work harder.
If you are working in an old fashioned newspaper and you move to a tech company, the tech company is more profitable, has greater margins, and you could work less hard. But your contribution in terms of productivity to the economy could be greater because you effectively are working smarter. In the wake of Brexit and Covid, the UK is in a unique position here.
We did inherit a situation where output per head productivity in the economy had already been weakening quite dramatically after the global financial crisis in 2008,2009. Which you can see here, altering a trend that had been in motion since the 1970s. You then have the impact of Brexit, which had a particularly sharp effect on investment, which we saw feed almost immediately into growth and again pulling down our overall efficiency, our output per head.
And then Covid has added this extra legacy. Which means we need our heads to be working even smarter. But for the time being, we need bodies too in the workforce.
And here we have another problem. Across the major advanced economies, every country saw an increase in the proportion of people finding jobs and going into the workforce or trying to after the pandemic. But look at the UK, we lost workers.
More people fell into long term sickness and people just dropped out. There's a million people, in a sense, missing from the labor force, many of them claiming disability benefit or sitting on NHS waiting lists. One of the drivers of growth over the last decade or two prior to the pandemic had been the increase in the participation rate.
So the proportion of people able to work actually doing so. By going into reverse, that has caused a very particular British problem. Participation has not come back since the lockdowns.
That represents a lot of missing productive capacity. This is all monumental pressure for the next government to withstand and relieve. They need to get the population able to work doing so and in a more productive capacity.
Then there's wiggle room to deal with high interest rates and bring down national debt, freeing up tax revenue to bolster public services and support the people unable to work in the first place. Everyone agrees this is an enormous challenge, but if it's one the new government can pull off, the potential gains are massive.
