Reading note: Great Britain?

Great Britain? | Torsten Bell (2024)

Is the UK economy broken?

This was my starting question in January 2025 ahead of my London move. I didn’t have the narrative at all clear in my head, but had heard various whispers that ‘things had changed’. I was searching for the best, most recent book on the topic, and soon found Torsten Bell’s research.

Bell’s latest instalment Great Britain? (published conveniently as he was elected as a first time Labour MP) provides a succinct overview of the issues to date. What’s more, he dedicated a fair amount of time to the treatment rather than rehashing the diagnosis.

There’s one stanza that captures the essence of the conundrum the UK faces:

The time has passed when the biggest generational threat to our social contract was pensioners being left behind as the economy grew. Acknowledging this is essential; not so as to blame older generations for the plight of the young, but to emphasise where we are falling short. Today we are in fact in an era of twin generational challenges: our failure to improve economic outcomes for the young, and our struggle to maintain our welfare state for the old.

One of the core themes of the book is that the ‘idea’ of Great Britain is so different to folks of different generations, geographies, occupations, and cultural heritages. There’s no longer a unifying economic narrative, meaning there’s multiple ‘truths’ competing for budget priorities.

My diagnosis of the current woes boils down to 4 key ideas.

Idea 1: Fix the Treasury rules

If there’s one place I’d start to fix Britain’s economic woes, it’s the HM Treasury investment rules. Webb writes:

The rules limit borrowing (how far spending can exceed taxes raised) in a given year and require public debt (the stock of borrowing) to be falling in give years’ time. The problem is that both rules treat investment spending, such as building a new council house, as indistinguishable from day-to-day spending, such as paying teachers’ wages - ignoring the fact that the former usually creates an asset, improving the government’s books (the public sector balance sheet). No company would ever think in those terms, but that is how we oversee the nations finances.

For those still trying to get up the curve (myself included), the current approach to British fiscal rules started under Gordon Brown, who as Chancellor in 1997 introduced the "Golden Rule" and "Sustainable Investment Rule":

• Golden Rule: The government should only borrow to invest, not to fund day-to-day spending — over the economic cycle.

• Sustainable Investment Rule: Public debt should be kept at a "stable and prudent" level relative to GDP.

There was nothing wrong with this approach, until the rules were butchered in 2008.

After the 2008 financial crisis, the UK saw a huge rise in public debt due to bailouts and stimulus. In response, fiscal rules became more focused on absolute debt levels and annual deficits, not on the quality of spending.

The Coalition government led by David Cameron (2010–2015) shifted toward stricter rules on overall borrowing and debt reduction. The causality of this approach is investment. Because the rules cap overall borrowing, capital spending often gets the chop when savings are needed. This incentivises governments to delay/cancel major projects to meet the rules.

For a country with anaemic productivity, potholed roads, and an ageing energy grid, fixing the Treasury rules seems like an obvious place to start.

Webb provides some ideas for rule changes (e.g. tax revenues to cover day to day spending). There are likely many others equally as suitable.

Idea 2: It’s the investment rate stupid

The UK investment rate as a percentage of GDP over the past 20 years has been truly shocking. This is true for both public and private investment:

Reflecting on this table, Bell writes:

Over time, this scant investment risks turning corporate Britain into a museum. A look at the top five firms in the FTSE 100 today should be cause for concern. They are old firms, in old industries.

The reasons why are complex, especially for the private sector. Bell notes that:

British managers are too often bad managers

The idea stemming from:

In British firms, managers rarely are in charge, and they face a highly unusual lack of pressure to invest for the long term, from both above (the owners) and below (the workers). Today, owners of listed firms are too remote. Foreign ownership increased from just over 10 per cent in 1990 to over 55 per cent in 2020, and is too dispersed to meaningfully monitor executives. Among rich economies, the UK has the lowest proportion of firms with ‘blockholder’ shareholders - owners with a sizeable stake, and therefore enough power and skin in the game to bother ensuring their firm has a strategy for growth, not just for profits today. Without that pressure, chief executives, who have short tenures and face immediate public scrutiny when profits fall short, will focus on the here and now.

This narrative seems about right - but there’s no simple (or immediate) solutions at hand.

Idea 3: Focus on more than just London

Regional differences, most notably been north and south have characterised UK society for centuries. Bell shows this distinction is still alive and well in just about every economic metric you can find:

Between 2016 and 2021, London’s service exports were up 47 per cent, totalling 152.2 billion. Yet service exports in Greater Manchester and Birmingham grew by just 11 and 3 per cent respectively. Productivity in Greater Manchester remains 12 per cent below the UK average. Birmingham, its competitor to be England’s second city, is even further behind (14 per cent). This is not an economy with all its engines firing.

Having genuine, highly productive ‘second cities’ needs to be a fundamental priority of the UK’s hub and spoke model.

We see this urban-regional divide play out in infrastructure. Bell writes:

The highest-profile attempt this century to boost the economies of Birmingham and Manchester was a high-speed train line (HS2) connecting their city centres to each other and to the capital. But after years of mismanagement the Manchester leg of the project was scrapped in September 2023, with the line now set just to link Birmingham to a London suburb - a hugely expensive project that no one would have set out to build, and which even the government department responsible for it recognises ‘offers very poor value for money to the taxpayer’.

It will take generational efforts to truly bring Manchester and Birmingham ‘up the curve’ - and the time to start is now.

Idea 4: Get realistic about housing

The horse has well and truly bolted on the housing market - especially in Greater London.

Webb hits the nail on the head regarding affordable housing:

Once the yuppies arrive (or anyone else, for that matter) then housebuilding is part of the solution, not the problem. But we must not forget the rest of the answer: for many poorer households, the market will never deliver housing they can afford. The need to more social housing requires both the higher levels of public investment that we discussed in Chapter 5 and cheaper land acquisition for councils. Britain’s stock of affordable homes is large relative to most of Europe, but relative to the number of families it has fallen by around 40 per cent since the 1980s, as few were built and many sold off.

Many highly dense, global cities have accepted this fate and started working on proper solutions (New York, Hong Kong, Singapore). London needs to throw off the shackles of old and accept that housing isn’t a standard market - it’s a fundamental human right.