Macroeconomic Policy

The 'sick man' of the G7?

“The ‘sick man’ of the G7”? The Bank of England and various leading economists have said the UK has entered recession, with a 0.3% month-on-month decline in GDP for November expected to be reported on Friday. This is part of a wider global phenomenon, with at least one third of the world (and half of the EU) predicted to be in recession this year, according to the head of the IMF. However, the UK looks set to fare particularly badly. Experts are predicting we will have the longest and worst recession in the G7, causing a former governor of the Cypriot central bank to label the UK “the ‘sick man’ of the G7”. More than 80% of top economists polled by the Financial Times predict that UK growth will not be stronger than its counterparts, while Goldman Sachs’ macroeconomic outlook has forecast a 1.2% contraction in the UK’s real GDP, with a recession almost as deep as Russia’s. Meanwhile, the eurozone will see a contraction of just 0.1% while the US economy is expected to grow by 0.25%, according to Consensus Economics. Living standards are also declining more rapidly in the UK than elsewhere, with real income expected to fall by 3% in the UK in the first half of 2023, compared to a 1.5% decline in the eurozone across the same period. 

  • But why? The combination of the energy crisis caused by Russia’s invasion of Ukraine and a “US-style overheating jobs market” is the “official rationale” for the UK’s particularly poor growth forecast, says the BBC’s Faisal Islam. However, specific UK policy decisions are at least in part to blame according to Islam. While other European countries may be more reliant on Russia for their gas supplies, the UK is more reliant on gas in its energy system. This, he argues, is making “the country unavoidably poorer” as the rise in international gas prices means we have to pay more for this essential import. An unusually tight labour market (meaning a shortage of trained workers relative to demand) has caused problems in supply chains of critical goods and services. Brexit and the pandemic have played a role here. 
  • “Structural hole” and a lack of investment. While recent shocks such as the energy crisis, Brexit and the pandemic explain some of the UK’s economic misfortunes, many argue that the problem is more deep-rooted. “The UK is in a structural hole, not a cyclical downturn”, argues Cambridge university professor Diane Coyle, one of the economists polled as part of the Financial Times’ annual survey. She calls for better trade relations with the EU and an “adequately long-term economic strategy” in order to improve UK living standards. The Guardian’s Larry Elliot suggests that the predicted recession both in the UK and globally points to a “crisis of capitalism” and that a reluctance, rather than an inability, to invest from both the government and the private sector is to blame. “Governments could have taken advantage of historically low borrowing costs to rebuild clapped-out infrastructure, but failed to do so”, he argues. Similarly, the Chief Executive of the Resolution Foundation, Torsten Bell, blames a lack of business investment in skills and automation for the UK’s growth problem, arguing that “Britain doesn’t invest in its own future”. 
  • Wage stagnation. While Brexit and the pandemic have both had a significant impact on the UK’s labour shortage, these issues may simply have exposed longer-term, structural problems at the heart of the UK’s labour market. Poor wages and working conditions in key supply chain sectors such as road haulage mean that workers are leaving or simply not entering these roles, according to the Institute for Government, although wages in some key sectors have begun to increase in response to shortages. Falling average real wages are holding back growth, with the OBR predicting that real household disposable income will fall by 4.3% in 2022-23. Lower household incomes means less household spending, which pulls back GDP. A wage boost in the form of a “real living wage” could grow the economy by £1.7 billion, argues the Living Wage Foundation.

Sunak’s answer. The Prime Minister set out his New Year vision to “address” Britain’s “issues” on 4th January - a speech labeled “defensive and defeatist” and a “somber assessment of Britain’s woes”. He delivered five pledges: to halve inflation, to grow the economy, to reduce the national debt, to cut NHS waiting lists and to introduce laws to detain those crossing the Channel in small boats.

Starmer’s answer. Sir Keir Starmer delivered a speech in the exact same venue as the Prime Minister on 5th January, setting out how “Britain needs change”. Starmer’s solutions revolved around tackling Westminster-led policy making and “sticking plaster politics”, with a focus on a mission-led approach and devolution of policy. Echoing economist Mariana Mazzucato, the Labour leader outlined how he would be announcing “national missions” over the coming weeks, with the first aimed at decarbonising the UK’s energy system by 2030. 

  • Industrial partnership between public and private sectors. Labour’s recent report ‘Prosperity through Partnership’ outlines their approach to cross-sectoral, collaborative and consistent approach to industrial strategy. (See the Treasury Committee’s report criticising the government’s ‘chop and change’ economic strategy since 2020.) CBI Director General Tony Danker noted in his 2021 conference speech that “we’ve had five decades where the free market has palpably failed” and called for a “partnership with government”.
  • A new “Take Back Control” Bill. Echoing the proposals made by Gordon Brown in a recent report for Labour on constitutional reform and decentralisation of power (See the IfG’s summary here), Starmer argued that “a huge power shift out of Westminster can transform our economy, our politics and our democracy”. The bill would devolve new powers over employment support, transport, energy, climate change, housing, culture, childcare provision and how councils run their finances. CLES’s Sarah Longlands argues that Brown's report does not go far enough in challenging “where power rests in the UK'' and fails to critique “the economic model that aids and abets [over-centralised decision-making]”.
Weekly Updates

Public services

Crisis in the NHS. NHS waiting lists have been firmly on the news agenda at the start of 2023 after the Royal College of Emergency Medicine’s Dr Adrian Boyle argued that delays are causing between 300 and 500 deaths each week. The FT’s John Burn-Murdoch explains why the crisis in the NHS is “the inevitable result of a decade of Tory austerity that steadily weakened the state’s capacity to respond to shocks”. An Opinium poll commissioned by Compassion in Politics has shown that Conservative voters “overwhelmingly believe their party has failed in its management of the NHS during their time in Government”.

Universal Basic Services and the cost of living crisis. The Social Guarantee’s Anna Coote argues that public service provision is a “glaring omission in our public conversation around easing the cost of living crisis”. She advocates for Universal Basic Services due to their “substantial cash-replacement value”, because they are worth much more to those on low incomes and are a better use of public funds than cash subsidies, and more. The Institute for Global Prosperity’s Henrietta Moore and Alexandra Boothroyd agree that solutions to the cost of living crisis should look beyond stabilising energy prices. Their new working paper explains how adopting Universal Basic Services can improve living standards in the long term.

Bringing public services back in-house. CLES have released a Toolkit for insourcing in Wales, a guide providing the rationale for insourcing various public services and practical guidance for procurement officers on how to go about it. 

Childcare reforms to be shelved? The Telegraph's Ben Riley Smith reports that Rishi Sunak is planning to “postpone indefinitely” Liz Truss plans to increase free childcare support by 20 hours a week and end mandated staff-child ratios

Tax and regulation

Norwegian wealth tax evaluation. A new peer reviewed article looks at Norway’s implementation of an annual net wealth tax. The authors consider how the taxation of wealth fits in with personal income tax, as well as its distortionary and redistributional effects, and the extent to which wealth taxation may cause adverse liquidity effects for private firms. It concludes: “we find favorable distributional effects and efficiency losses appear to be limited”.

Financial interests in Westminster. Tortoise and Sky News have created a database tracking flows of money to UK politicians. It involves a searchable tool to find out the source and value of declared donations to MPs, political parties and all-party parliamentary groups.


New anti-trade union legislation. The government has proposed new trade union legislation that might require key sectors to retain a “minimum service level” of provision during a strike. (The FT’s Jim Pickard notes that the government’s own impact assessment says the proposals could lead to more strikes and other disruption.) Tribune editor Ronan Burtenshaw explains how the legislation could “threaten trade unions with bankruptcy”, and interviewed RMT boss Mick Lynch about the plans. Trade unions and the Enough is Enough coalition are preparing campaigns to resist the legislation this year. 

High Pay Day. January 5th marked the day FTSE CEO earnings for 2023 surpassed the median UK worker’s full time annual salary; the median CEOs salary has increased by 39% compared to January 2022, whilst the median worker’s pay has only increased by 6%. Tim Thorlby offers a ‘biblical perspective on remuneration’ for Beautiful Enterprise and recommends maximum pay ratios and good reporting practices.  

Tackling skill gaps and reforming social security. Labour has announced proposals to devolve Whitehall’s power over Job Centre’s to local authorities and enable Universal Credit claimants to undertake more comprehensive training and studying to fill local labour shortages. Labour MP Alison McGovern said: “We should empower local authorities to look at what the opportunities are...and let towns and cities work it out.”


Personal debt crisis. The latest figures (November 2022) show UK credit card debt reached the highest monthly level since 2004. Debt Justice’s Heidi Chow said: 'Booming credit card borrowing at a time of falling incomes and rising costs are forcing people to become more dependent on expensive credit to make ends meet. The government must write off unsustainable levels of household debt'. Read Debt Justice’s proposal for a Fair Debt Write Down.

Cost of living payments. The Government has announced how its latest round of cash support for low income households will be spread over 2023, with most of the cash paid in 3 installments from Spring 2023. (Details of how the energy support package will help businesses are still to be released.) 

Combating inflation without harmful monetary policy. Former IMF Chief Economist Olivier Blanchard explained the role the state can play in combating inflation without resorting to harmful monetary policy, e.g. by subsidising the cost of energy (financed through excess profit taxes). He argues that the contractionary monetary policy is “a highly inefficient way to deal with distributional conflicts. One can/should dream of a negotiation between workers, firms, and the state, in which the outcome is achieved without triggering inflation and requiring a painful slowdown.”

Housing and ownership

Housing market update. The FT’s Chris Giles explains that UK homeowners face more expensive deals following Truss’s premiership as the ‘moron premium’ still looms over the mortgage market. Analysts are predicting a housing market correction this year, but how far will house prices fall? Forecasts of the drop in average house prices range from 1% to 20% in 2023.

Labour’s housing plan? Positive Money’s Martha Dillon reviews the new proposals to reform the housing market outlined in a new policy paper for the Labour Party by former Prime Minister Gordon Brown. (The Guardian’s Kiran Stacey reports that Labour is also targeting a new profile of swing voter: ‘middle-aged mortgage man’). 

Selling the family silver. The Telegraph’s Ben Wright and Simon Foy explains how assets previously owned by the British state have been sold off over the last 40 years to foreign investors, who owned two thirds of all UK shares last year. The article explores Norway’s Sovereign Wealth Fund - “the biggest investor in British Land” - and hints at establishing a UK version to restore public ownership of assets.

Publicly-owned wind farms in Wales. Julie James, the Welsh Climate Change Minister, has proposed a joint venture between the Welsh government and private developers for a state-owned wind farm to cut bills and share profits.