Are the government’s growth ambitions realisable?

1. Economic growth has been subdued since the global financial crisis

The period since the global financial crisis in 2008/09 has seen slow UK economic growth. Gross domestic product (GDP), which measures the volume of goods and services produced in the economy, rose by an annual average of 1.1% from 2008 to 2023.^[1] This was little more than a third of the annual 2.9% pace averaged over the decade to 2007. As figure 1 shows, after adjusting for changes in population, GDP per capita over the last 10 years increased by an average of less than 1% per annum. This was a fraction of growth rates in the post-second world war “golden age”, and, excluding the two world wars and their immediate aftermaths, close to the lowest rate since the “long depression” of the 1870s.^[2]

Figure 1. 10-year annualised change in real GDP per person, 1770–2023

The difference between recent growth rates and those of previous periods might seem modest, but the effects of compounding mean small differences add up. An economy growing by an average of 2.9% per year would be around three-quarters larger after 20 years. But were annual growth to average 1.1%, in line with the UK’s post-financial crisis norm, GDP would rise only 25%.

2. Weak growth has contributed to the UK’s economic, fiscal and social challenges

The cumulative effect of slower growth on living standards and the public finances has been linked to many of the challenges the UK faces today. These include a long period of weakness in real (inflation-adjusted) wages. After adjusting for consumer price inflation, average weekly earnings in September 2024 were slightly lower than at the start of 2008. In comparison, average real weekly pay rose by almost a quarter between January 2000 (when the Office for National Statistics (ONS) series begins) and December 2007.^[3] The consequences of low growth for the public finances and living standards have been also been connected with dissatisfaction with the state of public services,^[4] political polarisation,^[5] the use of housing as a vehicle for financial speculation^[6] (potentially reflecting a lack of alternative profit opportunities) and a perception among many people that the economy is not working properly.^[7]

Against this backdrop, the Labour Party made boosting growth an important plank of its general election manifesto earlier this year. Specifically, Labour set out an ambition for the UK to have the highest growth in GDP per person among the G7 group of major economies over consecutive years by the end of the current parliament.^[8]

How realistic is this aim? The records of past governments seeking explicitly to raise economic growth offer some reasons for caution. Efforts by the Conservative government of Edward Heath in the early 1970s to achieve stretching growth targets ultimately proved self-defeating by helping to fuel the high inflation of that period.^[9] And the economic boom and bust cycle of the late 1980s was partly a consequence of the Treasury overestimating the effect of economic reforms in boosting the economy’s capacity to grow.^[10]

In addition, the economy’s better performance in some past periods is not necessarily a good guide to the future. Strong growth over the decade to 2007 was fuelled in part by an unprecedented, and ultimately unsustainable, rise in private sector debt. Debt accumulated by households increased from the equivalent of 88% of household incomes in 1997 to a record high of 155% in 2007.^[11] The ratio of non-financial company debt to GDP almost doubled over the same period.^[12] And the production of oil and gas in the North Sea helped to buttress some past periods of relatively strong growth, but now makes a small, and dwindling, contribution to the output of the economy.

3. Demographics present a headwind to growth, but technology could be a (qualified) upside

Looking ahead, an ageing population is likely to present a structural obstacle to raising economic growth. Projections from the ONS show the number of people aged 20 to 64 to those aged 65 and older declining from 3.1 in 2023 to 2.8 by the end of this decade and to 2.5 by 2040.^[13] Usually, an older population implies slower growth in the working age population and employment and a potentially depressing effect on spending in areas such as consumer durables and housing.

That returns to growth from technological innovation may be declining is another potential stumbling block to raising GDP growth. In this view, the type of technological progress behind productivity growth over the past two centuries may not continue at the same pace in the future. One argument is that the current wave of innovation, grounded in information and communications technology (ICT), does not have the same growth potential as past innovations seen during, for example, the industrial revolution and the subsequent “ages” of steam, electricity and mass production. A second is that the ICT revolution is already quite mature and future progress is likely to be slower. A third is that, with world population expected to peak this century, so too might the pace of innovation.^[14] Others take a different pessimistic angle on the impact of technology, arguing that the pace of technological change may discourage investment in current processes if firms fear that future progress in areas like artificial intelligence (AI) and robots will render those investments unprofitable.^[15]

On the other hand, the potential boost to productivity growth from the rollout of AI could prove the ‘techno-pessimists’ may be wrong. This technology is still in relatively early stages and some are sceptical about just how quickly AI will boost growth.^[16] Nonetheless, there is already evidence that types of business which are most likely to use AI are seeing significantly faster growth in productivity than elsewhere.^[17] And an ageing population and declining birthrate imply that one challenge facing the economy may not be too few jobs but too few people.^[18] Artificial “people” may be coming along just in time.

4. Addressing the cost of building in the UK could be a growth-booster

Alongside AI, a second potential positive for long-run growth stems from the government’s proposals to reform planning and land use policies to make it easier and cheaper to build housing and infrastructure.^[19] Barriers and costs to building in the UK appear to be significantly higher in the UK than in other European countries.^[20] For infrastructure specifically, it has been estimated that infrastructure in the UK is about 10% more expensive than in the most efficient advanced economies.^[21] The UK’s so-called ‘productivity puzzle’ is probably less of a puzzle when these extra burdens are factored in.

A speedier and less costly planning process could translate into an increased supply of housing, boosting GDP directly via higher construction output and indirectly by making it more feasible for workers to relocate to high productivity areas.^[22] And reducing the cost of infrastructure investment could raise both the productivity of the infrastructure sector and the ‘bang-for-the-buck’ of public spending in this area.

The government’s actions in this area so far have included a commitment to raise spending on public sector investment relative to the previous administration’s plans, repealing the previous ban on onshore wind farms and pledging to introduce a planning and infrastructure bill, aimed at accelerating the development of infrastructure and the construction of 1.5mn homes.^[23]

Whether legislative action can overcome structural barriers to growth-enhancing policies presented by vested interests is unknown. In the 1980s, the economist Mancur Olson argued that periods of political and economic stability typically brought forth the emergence of privileged groups more concerned with holding on to what they had than accepting the creative destruction that inevitably accompanies economic change and growth.^[24] In this view, dealing with the power of such vested interests may be as important in raising the economy’s growth prospects as identifying and enacting the right policies.

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Cover image by Matt Seymour on Unsplash.