THE British economy continues to stagnate, with a series of negative consequences for prosperity including pay, poverty and public services.

This stagnation is long-term and so too is the decline in living standards. Cleary, a radical reorientation in economic policy is needed to reverse these trends.

There should be no room for complacency in Downing Street or elsewhere that the economy avoided the technical definition of recession — which is two consecutive quarters of economic contraction.

It is possible that even this level of economic activity could be pushed lower in subsequent statistical revisions.

The government has abandoned its childish “pledge” of the fastest growth in the G7 and said the focus will be instead will be on the “milestone” of raising living standards right across the country.

Yet these data show that the government has fallen at the first hurdle, with GDP per head  contracting across 2024 compared to the previous year.

Historically, falling GDP per head was very rare, especially in peacetime. But now it has become commonplace for the British economy.  

On this crucial measure, living standards for the population as a whole have fallen in each of the last two years and are still below their pre-pandemic peak. But this is such a long-term problem that average living standards are barely higher than they were before the Great Financial Crash in 2008.

This is a marker of the scale of the problem that faces the government.
 
Continued economic stagnation will have terrible consequences not just on a range of economic indicators but will also have grave social and political consequences.  

All sorts of malign organisms can grow in stagnant waters, which is why we have seen the growth of the right and the far right here and in many Western countries.

The stakes are very high, and the consequences of failure are very serious. This is why the government must not persist on the path of austerity which it set out on in the October 2024 budget.

The Budget included extremely large Tory-designed stealth taxes on ordinary workers, much larger than the furiously disputed increase in employers’ National Insurance Contributions.

There were below-minimum increases on public spending, leading to further deterioration of public services. There were also damaging cuts to public-sector investment, which will deter private-sector investment.

Finally, but not least, the Budget foretold an imminent, sharp cut in welfare entitlements and payments, amounting to an immoral attack on sick people and the poor.

But, just as austerity failed to deliver growth under David Cameron and George Osborne, and before that under Margaret Thatcher, it cannot lay the basis for growth now. In this country and all across Europe after the global financial crash, growth and improvements in living standards were only possible when austerity was suspended.

To achieve any growth in the economy and any increase in average living standards the government seems to be mainly relying on hope, as well as widely discredited nostrums around the impact on growth of deregulation.  

The Office for Budget Responsibility (OBR) is led by orthodox mainstream economists who use the Treasury model for the economy. They are not leftists or even mavericks. Yet they steadfastly refuse to adjust their forecasts higher to take account of the government’s reforms to achieve deregulation.

Clearly the OBR is too diplomatic to say so, but it is because they do not believe there are any positive effects on growth.

In fact, it is a Thatcherite myth that deregulation leads to growth. In general, deregulation will lower business costs. But polluted waterways, consumers scammed by high street finance and second-rate products unsellable overseas do not add to prosperity. This imposes a huge burden on the whole of society, which is borne disproportionately by workers and the poor.

The main problem of the British economy remains the private-sector investment strike. This is the primary source of the stagnation and its driving force. Private-sector investment growth has been zero since mid-2016.

Investment matters. Although it is a relatively small proportion of the economy, it determines the rate of expansion of the economy as a whole, like the relationship between a car and its engine. Investment can increase the means of production, which in turn produce the goods and services that we need.

There are two consequences that follow from a private-sector investment strike. One is that growth and consumption of goods and services remains weak. The other is that it changes the business model of an economy, away from a highly qualified, higher paid and secure workforce and towards a low skilled, low-paid and insecure workforce.

This is exactly what has been happening in the British economy over a prolonged period, made worse after each subsequent crisis from Thatcherism onwards. Falling living standards and deteriorating public services are a consequence of the private-sector investment strike.

Austerity cannot resolve this crisis. Government saving and reducing the deficit proves illusory because austerity weakens the economy. Tax revenues are depressed and public spending increases as poverty rises. With fewer customers, all of these tend to depress private-sector investment further. Austerity becomes a vicious circle as government spending cuts do not amount to savings.

There is an alternative. It is public-sector investment. In very many cases, this is more effective, more productive than private-sector investment.

A private developer or, say a local council can be granted central government funds to build a home. Both can either be sold or rented at the same value. But the private developer will get nothing back in terms of income and other taxes on the construction, whereas central government will. The net cost of the same asset is much lower to the public sector. Waiting for the private sector to build more homes makes no sense.

Crucially, increasing public-sector investment also forces the private sector to increase its own investment, as a supplier of raw materials, goods and services. In addition, there is no shortage of funds that can be borrowed to fund financially viable investment with a positive financial return.

Equally, there is no shortage of needed investment, in education, transport, infrastructure, housing and many more. They are what we need.

This is a new economics column, which will appear on the last weekend of the month. Keep an eye out for the next one on March 29.