Why is Britain poor?

‘Foundations’ offers a diagnosis and maybe a cure

Perhaps one of the few positive benefits of British teenagers being hooked on TikTok is that, by viewing the lives of their contemporaries in the United States, they might come to appreciate just how poor their own country is. And, who knows, some of them might even want to do something about it.

When my parents were born, Britain had been the richest country in Europe for a century, and still the second wealthiest on earth after the United States. Today many British regions are near outliers in western Europe on poverty, and the few foreign visitors who go outside the historic heritage cities are shocked by how run down our towns are. Yet the fundamental reasons for why Britain has fallen behind are strangely absent in the national debate; indeed, most politicians aren’t even that interested in the subject.

Perhaps that will change, with the ground-breaking essay, Foundations, written by Ben Southwood, Samuel Hughes and Sam Bowman. As a declaration of interest, I’ve known all three for several years, and count them as friends, but their report feels like something historic: a diagnosis of where things have gone wrong for us.

The theme running through the essay is that the British system makes it very hard to invest and extremely expensive and legally difficult to build, making housing and energy costs prohibitive. 

While we all know we have fallen in status, ‘most popular explanations for this are misguided. The Labour manifesto blamed slow British growth on a lack of “strategy” from the Government, by which it means not enough targeted investment winner picking, and too much inequality. Some economists say that the UK’s economic model of private capital ownership is flawed, and that limits on state capital expenditure are the fundamental problem. They also point to more state spending as the solution, but ignore that this investment would face the same barriers and high costs that existing infrastructure projects face, and that deters private investment.’

The problem is that ‘all of these explanations take the biggest obstacles to growth for granted: at some point it becomes impossible to grow when investment is banned.’

Even before the Russian invasion of Ukraine, the industrial price of energy had tripled in under 20 years. Per capita electricity generation in Britain is only two-thirds that of France, and a third of the US, making us closer to developing countries like Brazil and South Africa than other G7 states. Transport projects are absurdly expensive, mired by planning rules, and all of this helps explain why annual real wages for the median full-time worker are 6.9 per cent lower than in 2008.

In one of the most notorious examples, the authors note that ‘the planning documentation for the Lower Thames Crossing, a proposed tunnel under the Thames connecting Kent and Essex, runs to 360,000 pages, and the application process alone has cost £297 million. That is more than twice as much as it cost in Norway to actually build the longest road tunnel in the world.’

Britain’s political elites have failed, they argue, because they do not understand the problems, so ‘they tinker ineffectually, mesmerised by the uncomprehended disaster rising up before them.’

Even ‘before the pandemic, Americans were 34 percent richer than us in terms of GDP per capita adjusted for purchasing power, and 17 percent more productive per hour… The gap has only widened since then: productivity growth between 2019 and 2023 was 7.6 percent in the United States, and 1.5 percent in Britain… the French and Germans are 15 percent and 18 percent more productive than us respectively.’ The gap continues to widen, and on current trends, Poland will be richer than the United Kingdom by the end of the decade.

Britain began to fall behind after the War, but after decades of relative stagnation, its GDP per capita had converged with the US, Germany and France in the 1980s, and our relative wealth peaked in the early Blair years. (Personally, I wonder if one reason for the great Oasis nostalgia is simply that we were rich back then.) If Britain had continued growing in line with its 1979-2008 trends, average income today would be £41,800 instead of £33,500 - a huge difference.

France is the most natural comparison point to Britain, a country ‘notoriously heavily regulated and dominated by labour unions.’ This is sometimes comical to British sensibilities, so that ‘French workers have been known to strike by kidnapping their chief executives – a practice that the public there reportedly supports – and strikes are so common that French unions have designed special barbecues that fit in tram tracks so they can grill sausages while they march.’ Only in France.

It is also heavily taxed, especially in the realm of employment, and yet despite this, French workers are significantly more productive. The reason is that France ‘does a good job building the things that Britain blocks: housing, infrastructure and energy supply.’

With a slightly smaller population, France has 37 million homes compared to our 30 million. ‘Those homes are newer, and are more concentrated in the places people want to live: its prosperous cities and holiday regions. The overall geographic extent of Paris’s metropolitan area roughly tripled between 1945 and today, whereas London’s has grown only a few percent.’ One quality-of-life indicator is that ‘800,000 British families have second homes compared to 3.4 million French families.’

They also do transport far better, with 29 tram networks compared to seven in Britain, and six underground metro systems against our three. ‘Since 1980, France has opened 1,740 miles of high speed rail, compared to just 67 miles in Britain. France has nearly 12,000 kilometres of motorways versus around 4,000 kilometres here… In the last 25 years alone, the French built more miles of motorway than the entire UK motorway network. They are even allowed to drive around 10 miles per hour faster on them.’

Britain has many advantages, including a much-envied legal regime, low levels of corruption and a long tradition of free trade. The authors quote the economist Tyler Cowen, who said that England remains ‘one of the few places where you can really birth and execute a new idea’. 

Yet ‘we fail to capitalise on these rare advantages because the economy lacks the most important foundations: private investment is blocked from going where it could generate the highest returns, meaning we have lower investment than all our peer economies; in particular we do not allow investment in the infrastructure we need to allow people to access prosperous areas, the houses they need to live there, and the offices, labs, factories, and warehouses they need to work there, which, together with our high and rising energy costs, stop the companies in those cities reaching their full potential.’

Agglomeration is the key to economic success, because ‘no individual by themselves can create much value, no matter how gifted or hardworking they might be. They need to combine their efforts with machinery and other people to really succeed. Investment rates determine the amount and quality of the tools they can use; energy costs determine how they can use them; and agglomeration – including both housing and infrastructure – determines who they can use them with. More agglomeration drives higher rates of innovation, and increases the choices that businesses have about who to hire.’

Countries become rich when its people are able to move to the most dynamic cities and regions. They note how, in the 19^th century, huge numbers flocked to industrial cities across the North, Midlands and Wales: ‘Cardiff grew by around 1,000 percent in 45 years as people moved near the coal that enabled heavy industry. Manchester grew from 90,000 in 1800 to 700,000 in 1900, in part due to the soft water that enabled Lancashire’s world-beating cotton textiles. Liverpool grew by over 1,000 percent between 1800 and the 1930s.’

This continued into the 1930s, when ‘cities like Birmingham, Coventry, London, Leicester, and Nottingham expanded at breakneck pace as the link with raw materials was broken, and jobs shifted to offices and factories in the South and Midlands.’ 

Until the War, there were very few restrictions on development, and even after 1909, when permission was required from the council, these local authorities were incentivised to allow house-building through local property taxes.

Because of this, ‘people moved to places where wages were higher, raising wage competition for workers in the places that they left. This meant that there were fewer and narrower persistent income differences between places than those we see today. Liberal development policy generated a country with a natural force pushing against persistent, entrenched regional inequality, which was narrowing in the decades to the 1940s and has been widening since.’

Then, in 1947, came the Town and Country Planning Act (TCPA), which removed the incentives for councils to give planning permission, since they no longer received much of the upside from local taxes.

‘The law also added a requirement to get permission from national government for any development, and to pay to the national government a tax of 100 percent on any value that resulted from permission being granted.’ The TCPA also granted powers to create green belts around cities, and private house building has never recovered.

Systems become damaging when they create incentives for individuals to behave in ways which impoverish the wider community, creating a ‘tragedy of the commons’,  and they point out that local people bear most of the costs of new development - ‘disruption, congestion, and competition over access to state-provided services like healthcare and education’ - yet receive almost none of the benefits. This makes NIMBYism totally logical, and usually successful. 

There are other rules tying up development, such as the need to provide ‘nutrient neutrality’, or surveys ‘for protected species like newts and bats (even in places where their presence has never been detected).’

Many of these problems create their own destructive positive feedback loop. Higher housing costs lead governments to demand more subsidised housing, which act as a tax on new developments. Local politicians are incentivised to propose things like rent controls, a policy that has repeatedly failed whenever it’s been tried.

‘Because only the best paid people can afford to move to the most prosperous cities, there is no longer general migration across the economic spectrum, as there was in the nineteenth century when it was the poorest people who were most likely to move to find better work. Today, this has created a situation where only the most gifted and educated people can afford to move to richer cities and stay there. Their less well-off peers are quite literally “left behind”, and compete with one another over a narrow pool of jobs, driving the wages down even further, making those places feel even more deprived.’

Because the supply of homes in successful cities is so constrained, it makes it far harder for expanding sectors to grow there, as employers are ‘less able to hire mid- and lower-skilled people to support them in the workplace… It is not an exaggeration to say that Britain could be forgoing its role in another industrial revolution today – that of artificial intelligence, biotech, and related technologies – by making the corresponding mistake.’

Under the liberal pre-war system, Cambridge’s huge success in life sciences would have allowed it to grow, both up and out, ‘connected by new train lines, trams, tubes, and roads. It would likely have a population of at least a million today, just as Glasgow grew from a population of 70,000 in 1800 to over 700,000 in 1900 to facilitate its world-leading shipbuilding industry.’

The strangulation of growth is shown by the way ‘we blocked a £750 million film studio by a dual carriageway, right by the UK’s strongest film cluster. Britain is the most advanced country, per capita, in artificial intelligence, but we blocked a £2.5 billion “super hub” data centre site by the M25.’

This contrasts with how our ancestors made the country rich: ‘In the eighteenth century, a total of 1,116 private companies built and renewed 22,000 miles of tolled roads, while other companies dug 4,000 miles of canals. The result was by far the best transport system in Europe. In the nineteenth century, Britain built a system of railways that is still impressive today, despite having hardly been added to since 1914 (in fact, we have half as many miles of railway today than we did then). London had an extensive underground railway system in the 1860s, almost four decades before the first underground metro line anywhere else in the world.’

In a decade either side of 1900, five more underground lines were constructed, at no cost to taxpayers, while 90 cities built electric tram networks. ‘This superb transport system was one of the conditions of Britain’s revolutionary economic expansion, and of London’s position as the foremost city and unquestioned economic capital of the globe.’

Although this was largely built by the private sector, the state had a vital role. ‘Delivering national infrastructure is extremely difficult without compulsory purchase powers: if every property owner on the route of a railway can play holdout, it is extremely unlikely to be practicable to buy them all out voluntarily. Until the 1940s, these powers were created through private Acts of Parliament: a select committee considered requests for compulsory purchase powers from the project’s promoters, and if they believed the project was in the national interest, they created an ad hoc law giving the promoters the powers they needed to make it happen. This system was extraordinarily swift and inexpensive: the planning process for major national projects generally took months.’

Compare this to today, where even if HS2 had gone as planned, it would have been two-to-four times as expensive as similar projects in Italy and France. As it turned out, it is up to eight times as costly (if it is even finished).

Crossrail was the second most expensive metro line ever built, at £1.4 billion per mile, compared to the Madrid Metro, delivered at just £68 million per mile, or Copenhagen’s underground at £350 million per mile. Although the Elizabeth Line is still economically viable, ‘if construction costs were more moderate, dozens of other rail schemes would be good value for money too.’ For similar reasons, Britain also lags behind in electrification, not just compared to Italy, Germany or France, but even India.

Then there are trams, which flourished between 1890 and the 1950s, ‘enabling urban expansion, economic growth and higher living standards.’ Then they were almost all removed, which led grown Glaswegian men to weep in the streets. Many countries are now rebuilding these efficient and environmentally friendly forms of transport, yet France has again raced ahead, in part because our tram projects cost 2.5 times as much.

‘There are now French cities of 150,000 people with fast modern tram systems - towns comparable in size to Carlisle or Lincoln. It is inconceivable that cities of this size could get tramways in England at current build costs.’ The most egregious example is Leeds, the largest urban area in Europe without a metro system; the Yorkshire city is comparable in size to Munich, which ‘has an 11.4 kilometre tunnel in the centre of the city allowing it to turn its seven commuter railways into Crossrails, plus eight underground metro lines with around 100 stations, totalling more than 100 kilometres in length.’ A Leeds ‘supertram’ was given the go-ahead in 1993, and there is still no sign of it. 

Britain is also vulnerable to judicial review, excessive consultations and a system in which central government picks up the costs, reducing the incentives to deliver within budget. We also have hugely expensive environmental assessments, ‘like the 18,000 pages, costing £32 million, on reopening just three miles of track for the Bristol-Portishead rail link.’ 

Then there is energy, where we again compare badly with France, which gets 70 per cent of its needs from nuclear, compared to just 12.5 per cent here. Yet Britain, the country where the atom was split, built the first commercial nuclear power plant, and in 1965 ‘had more operational nuclear reactors than the USA, the USSR, and every other country in the world put together.’ We haven’t finished a single nuclear power station in almost three decades, during which time we have ‘shuttered eight reactors – and eight more are set for the chop.’

Britain grew rich by becoming an energy superpower through coal expansion from the Elizabethan period, meaning that by the 18^th century, the ‘average Briton ate something like 600 calories more per day than the average Frenchman, and was about five centimetres taller.’

Until the 1960s, Britain produced more energy per person than any other country except the US. As coal’s enormous downsides became clear, Britain became a leader in nuclear power, yet it has thrown that lead away, with a system ‘beset by extreme delays and uncertainty caused by planning and environmental approval processes’. 

From proposal to construction, ‘Hinkley Point C took ten years. By contrast, France and Finland have started building similar reactors in just three or four.’ Sizewell C required ‘a 44,260 page environmental impact assessment (EIA) and 2,229 written questions at examination stage… before a spade was even in the ground (which it still is not).’

This has contributed to Britain becoming ‘the most energy-starved nation in the developed world’, hammering our industrial sector; they cite the ammonia plant in Billingham which recently shut, citing high energy costs. ‘Deindustrialisation was not the inevitable result of economic progress,’ they argue, and even services-based economies like Switzerland and Sweden ‘have kept their energy costs well below ours and avoided the erosion of their industrial base that we have experienced.’

Britain has some deep and often worrying social problems, but all of these are aggravated by economic malaise, yet it’s rare for a politician to argue that Britain should be richer. Perhaps there are cultural reasons that make it unseemly to idolise wealth, but as the authors argue, ‘Prosperity is intrinsically important. It gives people security and dignity, leisure and comfort, opportunity and economic freedom. It gives us freedom to pursue our other national goals: caring for older and less fortunate members of society, upholding a law-governed international order, preserving and enhancing our landscapes and townscapes, and leading the way in world-changing scientific research.’

The ‘enduring strengths of the British social settlement – responsibility, autonomy, love of debate, respect for the individual’ – are sapped by economic failure. ‘It begets dependency, resentment, defeatism, division and bitterness. It turns win-win relationships into zero-sum ones, where someone else must fail for you to succeed. Economic reform is not only the key to prosperity: it is the key to preserving and amplifying what is valuable about our society itself.’

Although a tale of failure, this is essentially an optimistic paper, for the problems are not intractable or too culturally-rooted to solve. It can be fixed, and indeed it has been done before, by the much-maligned Stanley Baldwin government.

‘By the end of the 1920s, Britain was still reeling from the national catastrophe of the First World War… The housing sector was moribund, thanks to a combination of rent controls imposed during the First World War, tight lending policy, and the effects of rapid inflation, which made the rent controls even more punitive in real terms.’

The Baldwin government abolished rent controls and removed mortgage regulations, and as a result ‘millions of extra homes were built in just six years – the fastest period of building ever – probably adding several percentage points to GDP growth in just a few years.’ Homes sprang up where they were needed, allowing those industries to expand, and this was ‘the key reason we didn’t experience a Great Depression while Germany, the USA, and France did.’

During the 1930s, Britain was able to build a huge amount of infrastructure, including the national electricity grid, ‘with 4,000 miles of cables running across 26,000 pylons around the country’ put up in just five years. Electricity costs tumbled, Britain became much richer and, as a result, was able to survive its greatest ever test.

As the authors conclude: ‘Across the world, the economic collapse of the 1930s brought social malaise and political destabilisation. Britain’s success and prosperity averted these, and left it to face crisis and war in a position of strength, unity and confidence. The international situation today is not so grave as it was then. But the future is always perilous, and it is vital that Britain should once more have the strength and self-belief of 1939 with which to play its part in the leadership of the free world.

‘The good news is that the hardest things to create are ours already. No government can legislate into being a respect for the rule of law, appetite for scientific discovery and entrepreneurship, or tolerance of eccentricity and debate. Such a culture takes centuries to build: it is the most precious inheritance that we have received from the generations that went before us. By comparison, what we must do is surprisingly simple: get Britain building by removing barriers and lowering costs. If we can establish these foundations, growth and dynamism will follow. We have done this before. We can do it again.’