Growth and productivity

CEP election analysis

Executive summary

We look at the growth performance of the UK economy since the coalition government took power in 2010 in the context of the previous decade

Gross domestic product (GDP) per capita, one key indicator of material wellbeing, has experienced weak growth over the past 14 years. On average, it grew at only 0.9% per annum after 2010, just under two-thirds of the 1997-2010 average of 1.4%. Its level today is lower than it was at the time of the last election in 2019.

Total GDP growth has also slowed since 2010, but not by as much as GDP per person. This is because of rapid population growth, which in turn was largely driven by record levels of net migration. Migrants are just as productive and as likely to work as non-migrants, but by definition they increase the size of the population.

The slowdown in GDP per head growth has come despite increases in the employment rate, which has grown by over 4 percentage points since 2010.

The underlying cause of low GDP per capita growth is the collapse in the rate of productivity growth, which is the basic cause of many UK problems. For example, real wages are roughly at the same level as they were in 2007.

Other countries have also had slowing productivity growth since the global financial crisis of 2007-09, but the slowdown has been particularly bad in the UK. Decomposing this slowdown, we show that there have been generally slower efficiency improvements ("TFP") after 2007. But the UK's relatively poor productivity performance is mainly due to low capital accumulation.

Both public and private capital investment as shares of GDP are low in the UK compared with other countries. One of the reasons for this is policy uncertainty. There has been huge instability in recent years, with frequent changes in prime ministers, chancellors and business secretaries as well as policy changes and reversals in key areas of business policy. Having greater stability with a proper long-term growth plan will be crucial.

There is some consensus between the main parties on several issues, such as the need for pension reforms, and addressing planning barriers that hold back infrastructure projects and housebuilding. Planning reforms are politically hard and the Conservative government has made very limited progress – the Labour party seems willing to be more radical.

When it comes to taking a more strategic approach to growth, there have been various strategies and plans under the Conservatives, with the most recent in the Advanced Manufacturing Plan announced in 2023. Labour have set out a broader industrial strategy and intend to bring back the Industrial Strategy Council and place it on a statutory footing. They have also set out how the net-zero transition will relate to their growth mission via the Green Prosperity Plan, backed with catalytic finance for GB Energy and the National Wealth Fund.

Public investment has tended to be cut when public finances are tight and has been relatively low and volatile for some time. Indeed, planned cuts to public sector investment as a share of GDP are an implication of recent tax cuts announced by the Conservatives. Labour have set out some changes that might be more permissive of higher public investment, in particular removing capital spending from the deficit rule and having a greater emphasis on net worth. But Labour plan to keep to the government’s rule of a falling debt-to-GDP ratio between years four and five of a forecast horizon. This is likely to be the binding constraint on investment spending in the next few years.

The UK's level of productivity has been lower than that of its peers for many years. In addition to increasing capital investment, improving skills (particularly of non-graduates) and raising innovation are critical.

12 June 2024 Paper Number CEPEA057

This CEP election analysis is published under the centre's Growth programme.

This publication comes under the following theme: UK productivity and policy