Prime Minister Starmer promised to “secure the highest sustained growth among the G7 nations” prior to last year’s general election. However, under the new government, the UK economy continues to struggle. GDP growth was positive in the first half of the 2024 but stalled in the second half.
The third quarter of 2024 experienced 0.0% growth compared to the previous quarter, although it was forecast to be at least around 0.1%. The UK’s service sector recorded a 0.1% decline, with the financial and insurance sector, which forms 8% of the UK’s GDP, suffering a 0.6% reduction in activity. This is worth noting because the UK’s financial sector has been one of the country’s comparative advantages since late 1980s. Although business investment increased by 1.9% in the third quarter, the increase was partially offset by a 0.6% decline in gross capital formation which is a momentous indicator for the overall economic climate, and business expansion incentives. (Trading Economics/ United Kingdom GDP growth rate).
Starmer and chancellor Rachel Reeves said that economic challenges they inherited from the pandemic, Brexit, and the Russian invasion of Ukraine, had put them in a difficult situation to fulfil their growth promises. However, the construction sector grew by 0.7% in the third quarter of 2024, and the government recently promised reforms such as removing some green belt restrictions and reducing the influence of NIMBYs (Not in My Backyard) – who traditionally oppose developments and altering urban planning. The reform can make home building easier, leading to higher growth in construction (among other things). That decision is long overdue, but better late than never.
That being mentioned, Britain is still far from what can be described as a proper growth climate. From what economic theory tells us; economic growth is not a government-executed phenomenon. Governments measures can potentially help or hinder growth, but in general, growth is a multi-factor phenomenon led and done by individuals.
One basic factor could be seen as security of private property rights. This makes entrepreneurs who would like to raise funds or investors who already own funds, want to invest in places they find economically attractive and profitable. They can do this without being worried about government intervention or political forces distracting their concentration on what they are doing. Additionally, government intervention in the forms of overregulation, high tax rates or ‘green’ measures that increase energy costs will put a financial burden on businesses; leading to an increased cost of capital and ending up with low or no incentives to invest, especially in new businesses.
The second factor is a proper goods and services market governed by supply and demand. With this, the price mechanism signals to entrepreneurs and capital owners what consumers want, and what it would cost to satisfy that demand. This therfeore allows economic calculation to measure the risk of forming or using capital, employing a work force, purchasing equipment and producing inputs.
The third factor is having developed financial markets providing borrowers with loans. A banking system which is well-regulated (as opposed to over-regulated) with a guarantee of commitment to the contracts and competitive interest rates attractive for both lenders, and borrowers.
An evaluation of the UK’s position with regard to these factors is needed to decide whether the government’s growth priority claim can be taken seriously.
The UK has had a prominent reputation in preserving property rights since its modern history, most probably because it was one of the countries in which the Age of Enlightenment began and gave birth to virtues of a liberal society based on natural rights which property right is one of them. However, according to the Heritage Foundation’s 2024 economic freedom index consisting of 12 indicators of freedom on a scale from 0 to 100, the UK’s property rights score in 2024 has slightly decreased to 94.6 out of 100 from 95.1 in 2023, which is not overly concerning – but it is still worth asking why.
The UK’s tax burden score was 65.4 during two successive years of 2021, and 2022, but declined to 62.3 in 2024, meaning that both firms and individuals are under heavier tax burdens which will negatively affect investment and business development. Though the country is in a better state when it comes to the tax burden than some of its European counterparts like France and Germany, some other European nations like Ireland (78 out of 100), Iceland (73.6 out of 100), and Switzerland (70.4 out of 100), are doing better in that regard.
The government spending indicator, which is a measure of size of the government, is 34.3 in 2024, a drop from 41.9 since last year which reflects an overall increase in government spending as a share of GDP. Other things equal, the larger the government and its costs, the fewer the resources left for private economic activity, as the government will borrow more to finance its spending programmes and budget deficits leaving businesses with less capital for growth.
Business and labour freedom are two indicators showing positive trends since the last couple of years with the former being 82.7 and the latter being 63.2 in 2024 compared to 79.1 and 62.2 respectively in 2023. However, the news coming from businesses and potential investors to fuel the market do not seem to be optimistic. According to the Telegraph, “Over 6000 millionaires fled the UK to avoid a tax grab”. Investment Migration Insider, another British business climate observer, reported that “The UK lost 10800 millionaires in 2024”, meaning one millionaire per 45 minutes! This obviously is a concerning trend and bad news for the UK’s business climate in particular, and for its economic growth in general as explained above.
If the UK is to achieve economic growth and higher standards of living (as claimed to be the government’s first priority) there needs significant score increases in economic freedom indicators. This would lead to an environment motivating enough for people who are willing to fulfil the needs of their fellow humans through entrepreneurship, and investment.
