Why be a poor version of Germany instead of doing what we do best? | Torsten Bell

It’s time to get serious about the British economy. Yes, we are a member of the family of high-income nations, but we are a long way from the top of this group and the gap has been widening. Growth ground to a halt in March and the OECD forecasts the UK economy will not grow at all in 2023, a worse performance than any G20 country bar Russia.

Such predictions of future underperformance should be treated as highly uncertain, but our recent experiences of it are painfully concrete. We caught up with more productive countries such as France, Germany and the US during the 1990s and early 2000s. But that came to an end in the mid-2000s and our relative performance has been declining ever since. While we are not yet in danger of relegation from the top division, we are increasingly a long way from qualifying for the Champions League.

Our productivity growth in the 12 years since the financial crisis has been half the average across the 25 richest OECD countries. This slow growth combines with high inequality to mean our poorer households are very significantly poorer than their equivalents in France. We cannot go on like this. Both main political parties recognise the need for change. The former chancellor Rishi Sunak rightly noted that consistently weak investment by British firms was holding back growth, while Rachel Reeves, the shadow chancellor, points to weak growth as a key reason the tax burden is rising. But a growing consensus about the problem is very different to being serious about the solution.

We are not, for example, even serious about the fundamental building block of any renewed economic strategy: what kind of economy the UK is. Commentators often talk of the British economy as being narrowly built on banking, which is as misplaced as the claim that there is an easy route to turning ourselves into a German-style manufacturing superpower – remember George Osborne’s promised “march of the makers”? These pop narratives obscure the reality that Britain is a broad-based services economy. We’re talking musicians and architects, as well as bankers. Information and communications technology, culture and marketing, as well as finance (whose fraction of total exports fell from 12% to 9% in the pre-pandemic decade). No one celebrates it, but the UK is the second largest exporter of services in the world. And our service specialism does not lie behind our recent underperformance: on average, services-led economies are richer than manufacturing ones.

We have manufacturing strengths too: pharma, aerospace and beverages stand out – yes, scotch is big business for us. But the service-led nature of our economy is not going away. The things countries are good at are highly persistent: of the top 10 products the UK specialised in back in 1989, seven were in our top 10 in 2019. Germany won’t leapfrog France in the quality of its wine, nor will Brexit, despite claims, shift us towards producing goods rather than services (some manufacturing sectors will grow (food) but others shrink (electronics). The route to future prosperity lies in being a better version of Britain, not a British version of Germany.

Recognising the nature of our economy is not the same thing as welcoming all aspects of it, but an economic strategy that fails to understand it is no strategy at all. It will leave us without a clear view of how growth is achieved and exposed to policy mistakes.

Within the recent past, we have signed a trade deal with our largest market, giving the EU the goods access it wanted, with little service access in exchange. The Treasury’s big tax cut for firms that boost investment – the “super deduction” – applied for firms investing in plant and machinery, but not the intangible investments that service-led economies thrive on. And we seem to spend a lot of time worrying that young people in Britain are receiving too much education, despite the central role for human capital in driving on economies such as ours.

We need to understand the nature of our economy, not only to make a success of it, but to address the downsides it brings, in particular, upward pressure on inequality between people and places that comes because globally successful service firms employ high earners who are based in too few places. Addressing this is essential and possible. France is service-focused like us but has much lower inequality, while our advantages in services could support a strategy that combines a drive for stronger growth with a meaningful levelling up agenda.

High-value service industries thrive when similar firms co-locate in large places with highly educated populations: cities. And it is a huge public policy failure that far too few of our cities outside London capitalise on that. But the scale of investment required means that won’t happen without national politicians seeing it as central to our national growth strategy or local politicians feeling able to embrace the disruption because they have the powers to shape it. Success does not look like every major city becoming like London, given very different specialisms, cultures and sizes. And nor is this a strategy for the few: 69% of the UK population live in cities or their hinterlands, compared with 56% in France and just 40% in Italy.

Britain has huge strengths, but we all know we must do better. And the most important first step to improving our country’s economy? Understanding our country’s economy.