Musings on Britain's lack of productivity growth (and why we ain't been remotely neoliberal since the '90s)

Britain’s problems are that, since at least 1997, and probably since 1990, the nation’s governments have done the opposite of ‘neoliberalism’.

“Like most other developed countries, income and productivity growth has been very slow in the UK since the financial crisis of 2008–09. But on a per person basis, economic growth has been slower than in the US, the EU27 and Germany in that time. The slowdown has been particularly stark given that the UK economy, and its productivity, were growing quite quickly prior to 2008. While employment growth has been strong, average earnings growth has been dreadful - for which read almost non-existent. Gross Domestic Product per head is today nearly £11,000 lower than it would have been had pre crisis trends continued.”

It doesn’t have to be like this. This reality is a direct consequence of choices made by successive governments. From Gordon Brown ‘saving the world’ to the post-Covid triumph of welfarism, British governments’ have opted for policies that acted as a great sheet anchor on the prospects for economic growth. It is hard to pin down the reasons for this disaster, they certainly aren’t exclusive to Britain as economic crises in Germany and France attest, but it is very clear that economic policy everywhere in the West has acted to stress the role of government in economic growth, the significance of regulation - most usually international regulation of one sort or another, and a bigger focus on state-ownership or direction. At the same time, critics of economic policy from left and right speak of ‘neoliberalism’ and that the world’s economic challenges derive from the supposed disaster of free market liberalism and the era of Thatcher and Reagan.

It is peculiar that, in a world where government is large and regulation extensive, the criticism of economic policy is that it favours small government and light touch regulation. And we get bizarre assertions like this in “From Thatcher to Johnson: 40 years of Neoliberalism in the UK, Continuities and Adaptations”:

“This chapter focuses on the principal features of neoliberalism in the UK over the last 40 years. Successive governments—New Labour (1997–2010), the Conservative/Liberal Democrats coalition (2010–2015), and the Conservative government (since 2015) have remained faithful to this model, even if they also took measures that were out of step with it.”

The writer here, Catherine Mathieu, is correct to observe that much of economic policy since the 1990s has been anything but ‘neoliberal’ and then asserts that, nevertheless, governments are still a bunch of neoliberal Thatcherites. The belief in neoliberalism as the principal determinant of economic policy is now little more than a statement of faith, a statement that regardless of all the evidence to the contrary ‘neoliberalism’ is the world’s dominant economic ideology.

There are those who, with more merit, ground neoliberalism in Thatcher’s domestic agenda rather than in simply free market liberalism. The criticism here involves firstly the argument that the 1970s were really all that bad after all and that the economic outcomes of 1980s Thatcherism were less good than its advocates claim. These arguments are found from both left and right, reflected in a renewed enthusiasm for an ‘Old Labour’ (or, if we’re honest ‘One Nation Tory’) managed economy and in the Trumpian eagerness for tariffs, import substitution and industrial strategies. All of these arguments are accompanied by the rejection of the Thatcherite belief in supply side reform, deregulation and privatisation.

Economists are mostly agreed that Britain’s problems stem from a collapse, indeed almost the absence of, productivity growth since 2008:

“Britain’s relative lack of growth in the last fifteen years can be explained by a decline in productivity. Productivity is defined as the average output produced for each hour of work done in the country. Much like GDP, productivity in the UK has stagnated in an unprecedented way: in the 35 years before 2008, productivity doubled. In the 15 years since, it has gone up by 5%. This stagnation became known as the productivity puzzle, and has prompted a lot of debate amongst economists.”

The article that opens with this observation presents a variety of possible reasons for the productivity dilemma - lack of investment, unemployment, Brexit, Covid and the energy crunch. And, while the article is targeted at ‘A’ Level economics students, it is curious that it doesn’t mention tax or regulation (essential enemies in the neoliberal model we are supposedly following) as possible reasons for the productivity crunch. Even the decidedly statist OECD has noted how regulation drags on economic growth (emphasis mine):

“The latest OECD Economic Outlook, in its thematic chapter Time for a Regulatory Reset? (OECD, 2025a), confirms that this is more than a feeling – and that it matters for growth. Labour productivity growth has slowed across most OECD countries since the late 1990s, due to weak business investment (OECD, 2025b) and diminished economic dynamism, which reflects the declining likelihood of new firms to enter and scale-up, workers to change jobs and scarce resources to be reallocated towards more productive firms (Figure 1). Some of this is due to benign forces such as ageing populations or the rise of firm-specific human capital in an intangible-driven economy. But growing regulatory frictions are also part of the story.”

The OECD notes how there has been a gradual increase in the share of employment directed to regulatory management and compliance showing that “...the average increase in compliance costs is associated with roughly 0.5% lower labour productivity and a 0.4 percentage point drop in the employment share of young firms.”

Meanwhile the triumph of welfarism and the entitlement economy in Britain has led to taxes reaching historically high levels and for political (and practical reasons) for those increased taxes to fall most heavily on the most productive people in the economy. The World Bank is very clear about the link between low taxes and economic growth, and the OECD observes that the preferred taxes in much of the developed world (corporate taxes, payroll taxes and income taxes) are those least conducive to productivity and economic growth.

It is self-evident that higher rates of corporate taxation will reduce firm investment (and, we assume, productivity) and there’s a strong case for the same effect being seen with higher rates of personal income taxes and capital gains taxes. Yet the UK has increased the proportion of income tax paid by the most productive as well as rates of corporation taxes. Proposed changes to capital gains taxes will result in capital owners not realising capital gains having a further negative effect on investment and productivity growth.

This is all, as its critics will be quick to claim, orthodox ‘neoliberalism’ (or common sense as others might observe) but there’s a further part of this to consider, the role of the public sector. The British state has grown steadily in size since 2008 with most of that growth driven by the increase in financial entitlements (pensions, benefits, right to support) and health costs. The British state’s activities make up 25% of GDP and its spending represents 46% of GDP so how efficiently all that is done matters. The evidence tells us that the public sector is a big part of Britain’s productivity conundrum:

“The single biggest factor in the disappointing UK productivity figures this century has been the poor performance of the one fifth of the UK economy that provides health, social services, education, defence and other public services – predominantly in the state sector.

The March 2024 Office for National Statistics (ONS) figures reveal that public sector productivity remained 6.4% below its pre-Covid 2019 peak, whilst the private sector has now surpassed its 2019 level. In its study of the long period from 1997, the ONS shows that over more than a quarter of century the public sector did not increase its productivity at all. It fell a little to 2010, rose a bit to 2019 and then lost all the gains leaving it back where it started by this year. The big fall in 2020 was not fully recouped by the recovery in 2021.”

The lack of supply side reforms, poor tax policy and increased economic regulation are, alongside a general lack of investment across the economy, big reasons for Britain struggling to raise its productivity. The current approach, seen in the last couple of budgets, is focused on delivering ‘savings and efficiencies’ across the public sector with “...all government departments to deliver at least 5% ‘savings and efficiencies’ by 2028–29.” The government is laying its bets on investment in the use of AI along with a wider digitisation agenda, something the IFS observe has been a feature of similar productivity strategies in earlier budgets under different political leaderships.

One of the ways in which Britain has moved away from that 1980s ‘neoliberalism’ is believing that simply mandating efficiencies is an effective budget management strategy. Thatcherites would say that, if you want to reduce spending, then the state has to either stop doing things it doesn’t need to do or else transfer activity into the more productive private sector. And the double whammy here comes from stopping doing things that unnecessarily regulate economic activity - we get a boost from a less regulated economy and a smaller, more focused public sector. If we reduce enough of this unnecessary activity we also open up the chance to reduce taxes on the most productive, further boosting investment and productivity growth.

Britain’s problems are that, since at least 1997, and probably since 1990, the nation’s governments have done the opposite of ‘neoliberalism’ (except perhaps in trade policy) with the result that an interfering, overmighty and very overweight state eats the nation out of house and home. And because so much - approaching 50% - of government spending is simply the distribution of cash to people who qualify for one or other entitlement, the prospect of a renewed Thatcherism gets vanishingly close to zero. Why would anyone in receipt of the state’s benevolence and generosity vote for people who want to take some of that away? The result is stagnation and decline. As a friend said to me recently, nothing changes until something breaks, and that hasn’t happened yet.