Britain is once again the sick man of Europe

As an Eeyorish forecast predicts Britain will have the highest inflation in the G7 - precisely the opposite of what Keir Starmer promised - this government needs to stop us from heading back to the bad old days, says Sean O’Grady

It’s like the 1970s again. The Organisation for Economic Cooperation and Development, a well-respected international group, is one of the more reputable bodies that make forecasts about the economy, free of ideological spin. They say the British economy will grow by a pretty miserable 1.4 per cent when all the data for this year is in, slowing further to 1 per cent for 2026.

Compare this with the latest figures from the Office for Budget Responsibility, the official UK watchdog - 1 per cent for this year, 1.9 per cent for next. But significant downgrades to those official projections are expected. Most forecasters think growth will be below 2 per cent for the rest of an uncertain decade. Compare that with the 2 to 3 per cent the UK enjoyed for most of the post-war period until the global financial crisis in 2008.

Basically, there is not going to be much money around for some time, and, as is sadly widely assumed, that means higher taxes and lower public spending than planned or desired, and a continuing squeeze on living standards.It will feel like the economy is at times skirting the borders of ‘recession’, with only mildly ‘negative growth’. The OECD warns that inflation will also be relatively high, compared to other large economies - 3.5 per cent this year, 2.7 per cent next - and with food prices being most visibly up. That in turn means the Bank of England will not cut interest rates any faster than it is currently contemplating.

In the 1970s, as now, poor productivity growth was a fundamental problem, driven by low investment, leading to a vicious circle of decline (PA Wire)

In the 1970s, as now, poor productivity growth was a fundamental problem, driven by low investment, leading to a vicious circle of decline. Taxes were too high and the state too big in those days too, threatening to crowd out private investment. But today, there seems more of a push for infrastructure, such as the expansion of Gatwick airport, than in the Heath-Wilson-Callaghan era. Then as now, energy costs were elevated, and the public finances rickety, with low financial confidence, and the extreme right making ominous noises – the difference being that they are now far closer to power than a half century ago.In the words of the OECD, Britain will be held back by "a tighter fiscal stance, higher trade costs and uncertainty" which it said would "drag on external and domestic demand".

The good news is that we know what needs to be done, because the economic conditions of the 1970s didn’t last forever, and the per capita income in the UK did not fall below that of Communist Bulgaria, as was feared at the time. Bad news: none of it is easy. First, we joined the European Economic Community in 1973, and the full benefits to competitiveness and market access built steadily over the decades, particularly after the completion of the British-inspired EU Single Market in 1992. In principle, we could replicate that by rejoining the EU. This would also mean a return to free movement of labour, and we have to have higher immigration to boost growth. I’ll say no more about that controversial prospect, except that the Starmer administration will need to think about its next election manifesto…

Second, the Thatcher and Major governments liberalised and deregulated the economy. In some areas this is being modestly reversed - the labour market, housing - but in others, especially planning, it is improving. In due course it will bring benefits, but not fully so for maybe a decade.

Third, the price of oil gyrated, and North Sea oil came on stream, but the long-term trend that also counted was towards a much more energy efficient economy, less dependent than before on hydrocarbons. The current domestic green energy revolution should also deliver lower bills for business and households, but there seems little certainty about this. It requires more investment, to benefit consumers and for obvious geopolitical reasons.

Most powerfully, and only dimly glimpsed in the later 1970s, was what was called the information technology revolution. Governments took on a supportive role, and the US military “invented” the internet, which transformed economies and living standards almost everywhere. If we allow it, AI and robotisation may do the same again, and rescue humanity from a dismal future.

Yet much of that might have never happened without the shock of the collapse in Britain’s public finances in the mid-1970s and a long, hard slog with lots of setbacks under successive administrations to get the national debt and the cost of servicing it under control.

Some tough budgets and years of high interest rates and hardship were required through the 1980s and 1990s to achieve that essential ingredient for healthier growth.

As was said at the time, there was no alternative; and Rachel Reeves has no choice but to do the same, come November. Too often measures such as the hike in employers’ National Insurance contributions are seen as dampeners on growth and employment - but they are essential for any chance of longer-term stability. Reeves’ policies aren’t the problem, they are part of the answer. She needs to explain that rather better.