For nearly 20 years now the British economy has struggled to grow. GDP per capita – i.e. total national income divided by number of people – has been growing at just 0.5% a year. In the decades between 1950 and 2008 it had grown at well over 2% a year¹. The result is that national income per head is around a quarter lower² than it would have been had that previous trend continued. That is a prosperity gap worth £15,000 to the average person.³

At the same time real earnings have barely grown. They are today a good 25% below⁴ where people in 2007 might reasonably have expected them to be. That is a huge loss. The 2010s may well have been the worst peacetime decade for earnings growth in over two hundred years.

Many other countries have also suffered a slowdown in productivity growth, and hence growth in living standards since the financial crisis. It would be wrong to blame all of the slowdown suffered in the UK on government policy. But growth in this country has slowed down by more than in almost any other comparable country. Not only have we suffered a massive shock to our expected standard of living, we have fallen increasingly far behind other countries.

There are reasons why we have done worse than others. Decades of low levels of investment, by both public and private sector. Poor infrastructure, especially transport infrastructure, outside of London. Poor control of our public finances and of inflation. A highly complex and damaging tax system. A planning system that makes building slow, expensive and uncertain. An increasingly burdensome and intrusive system of regulation. Brexit and the additional costs imposed on trade. More than a decade of political chaos. The most centralised policy and fiscal decision-making apparatus in the western world. A misfiring vocational and technical education system. Exceptionally high energy prices, caused largely by policy decisions. There is more.

Later elements of this project will investigate all these and other reasons for our, relative and absolute, economic decline. These are listed here simply to illustrate that low growth is not inevitable. It is a choice.

In one sense the consequences of all this are obvious. We are (a lot) less well off than we might otherwise have been. In fact, the combined consequences of this lack of growth and other policy decisions, are rather more profound than that.

The most obvious effects flow through the changing relationship between earnings and wealth, between earnings and inheritances, and between generations. In short, wealth has become much more important relative to income. That has advantaged older generations, who had more wealth when stagnation hit, and who have also benefited from decades of asset appreciation – in the housing market at least until 2008, and in the stock market. Layered on top of that, many benefited from phenomenally generous defined benefit pensions, for which younger generations have ended up paying.

But this is not a one-off effect. Because wealth is very unequally distributed, and it cascades down generations, this period of stagnation is also having effects on social mobility and the life chances of those from different backgrounds. Those whose parents are owner occupiers are much more likely to own a home themselves, even once you control for their earnings. We know that inheritances will be worth about twice as much, relative to their lifetime earnings, to those born in the 1980s than they were for those born in the 1960s¹¹. But that is an average. Some will inherit a great deal; many will still receive little. The truth is the wealth of your parents is becoming a more and more important determinant of your own lifetime economic resources, a trend that is undoing a century or more of movement in the other direction.

And these things are sticky. When wealth levels grow and earnings do not, it becomes much harder to earn and save your way up the wealth distribution. One calculation suggests that someone on average earnings who could miraculously save everything they earned would have needed 10 years to move from the fifth to the ninth decile of wealth in 2007, but 16 years by 2017¹².

The most obvious manifestation of these intergenerational differences is in the housing market. Those in their 30s today are around a fifth less likely to be owner-occupiers than they were in the mid-1990s¹³. Rental costs, especially in London and some other thriving cities, are extremely high. This directly impinges on living standards. It also makes it increasingly hard for those without parental wealth to move to these cities and hence access the best paying jobs. Wage progression is much steeper in London, but you can’t access that progression if you can’t afford to take a job there in the first place.

So, stagnation also locks in differences between regions. It is only in London that the graduate wage premium has held up and where fractions of graduates entering “non-graduate” jobs have not risen. The relative failure of regions outside of London and the South East is not new, and has not got worse since growth stalled. But as with other forms of inequality, it is much less bearable when incomes are not growing, and when opportunities are denied.

All this is starkly illustrated by some simple comparisons between the situations of people around the age of 30 today and 20 or 30 years ago. Median earnings for people in their 30s today are actually around 7% lower in real terms than they were in 2007¹⁷. First-time-buyer house price to earnings ratio is 4.8 today versus 2.4 in 1997¹⁸ (though note that all the increase happened between 1997 and 2007). Some 57% of 30-49 year olds today are owner occupiers compared to 73% in 1997 and 70% in 2007¹⁹. There has been a huge rise in private renting, especially among those on middle incomes. Defined benefit pension coverage has also collapsed, to well under 10% in the private sector²⁰.

All of this has been exacerbated by policy decisions. Pensioner incomes and benefits have been protected, working age benefits have been cut. Young graduates face what is effectively an additional 9% tax²¹ on their earnings. More and more of the working age generation have been pulled into very high rates of tax. We have built far too few houses, and imposed a tax system that impedes an effective housing market. We have deprioritised spending on education. Health spending has risen from around a quarter to more than 40% of public service spending since the turn of the century. The list could go on.

Poor growth is also behind many of our fiscal problems. The same level of tax raises a lot less money to spend on public services when the economy is smaller. Growth doesn’t solve all those problems – we need to pay public sector workers wages that are competitive with those in the private sector, for example – but it helps. The tax burden in the UK will have grown to its highest level ever over this decade and by a good 5 per cent of national income²⁵ – a change historically unprecedented in peacetime. Spending is also settling at a level five percentage points higher²⁶ as a fraction of GDP than it was pre Covid. Yet public services remain poor on most measures.

We end up risking a doom loop. Incomes don’t grow, so the tax take doesn’t grow to cover spending needs. So we raise taxes, which bear down on already stagnant living standards. For reasons of political expediency, we raise them in ways that may be more palatable but in fact damage growth. We try to avoid all this through borrowing more. But the costs of borrowing come back to bite us – as they have – when interest rates rise and we end up spending more on servicing our debt than on any public service bar the NHS. Which puts pressure on taxes and leaves less for other spending. And so on.

It is no wonder the population is restive. Two decades of poor growth have fundamentally damaged the country. They have baked in inequalities that were, perhaps, bearable when living standards were rising, but not when things have stopped getting better. They have increased other inequalities, and reduced both social mobility and social cohesion. In a zero-growth world everything becomes a zero-sum game and politics becomes much harder.

Yet we need to address the underlying issues because things are not going to get any easier. The demands on public spending – notably health, pensions and defence – means that both spending and tax will rise even beyond already record levels. Increasing the tax burden further on a population that is already unhappy about lack of disposable income will make for difficult politics.

AI offers an opportunity to help with growth, given the UK's natural strengths in this area. And recent developments in international politics also underline the importance of sovereign capability: countries that can develop, access and deploy advanced AI on their own terms will be better placed to capture the gains. But that opportunity will not be realised without the wider foundations of prosperity in place: competitive energy prices, good infrastructure, and the ability to attract, develop and retain the talent these industries need.

Without growth, what would be challenging but manageable could become close to impossible. The clamour for “easy answers” will only get louder. Economic growth is not sufficient for dealing with all the problems we face. But it is absolutely necessary.