The UK needs more businesses to fail, or at least shrink, to solve the economy’s long-running productivity crisis, a study has argued.
The country’s lack of “economic dynamism”, whereby weaker firms or lower productivity sectors shrink, and more productive ones grow, has caused GDP to be 4% lower between 2008 and 2019 than it would otherwise have been, according to a paper published on Monday by the Resolution Foundation.
The economic thinktank added that the lower production equated to a £1,400 annual income loss per household over the 15-year period, which began at the onset of the financial crisis.
Greg Thwaites, research director at the Resolution Foundation, said: “The British economy has spent the past 15 years struggling from one major crisis to another. But while many people assume this severe economic turbulence has led to major economic change, in fact the opposite is true. Our economy is instead suffering from a Great British slowdown, which has hamstrung our economy.
“Britain needs more, not less, economic change. We need successful firms to grow, and struggling ones to shrink.”
The Resolution Foundation is run by Torsten Bell, who worked in the Treasury during the financial crisis and was a director of policy for the Labour party. The thinktank’s report was funded by the Nuffield Foundation, a charitable trust that says it aims to “advance educational opportunity and social wellbeing”.
The paper makes the case for policymakers to start “embracing and encouraging economic change” via a series of actions including reducing transaction taxes such as stamp duty and reforming the VAT threshold, which now “discourages businesses from growing beyond a certain size”.
The research paper appears to contain some echoes of the economic theory of “creative destruction”, a theory that traces its origins back to the work of Karl Marx and describes how new innovations replace older ones.
The publication of the Resolution Foundation report comes amid renewed signs of stress in the British economy. High interest rates, continued economic uncertainty and low productivity could see the UK struggle to grow in the second half of the year – with GDP growth forecast at 0.4% in 2023 and 0.3% in 2024, according to the latest outlook published by the accounting firm KPMG. The forecast is, however, marginally stronger than the 0.3% for 2023 it predicted in June.
The firm added that inflation, which was 6.7% in August, might remain stubbornly high, with issues including strong pay growth meaning that inflation wil only return to the government’s 2% target by the latter part of 2024. On Thursday, the Bank of England paused its run of interest rate rises for the first time in nearly two years, raising the prospect that a peak in borrowing costs has been reached in its battle against inflation.
Yael Selfin, chief economist at KPMG UK, said: “While interest rates have now potentially reached their peak in this cycle, uncertainty remains regarding their future path … given the state of public finances and the challenges ahead, the UK economy will be better served by focusing on the longer-term challenges, such as tackling climate change and increasing productivity and long-term growth.”
