The British economy continues to perform poorly. There is an emerging political consensus, shared by both Rishi Sunak and Keir Starmer, on the need to boost growth. But growth plans and industrial strategies have come and gone over several decades with little to no effect. After a succession of wrenching crises in the past 15 years, a more sensible and attainable aim is to make the economy and public services more resilient to shocks. How might that be achieved?
Growth has been lacklustre since the financial crisis of 2007-09. Therein lies a clue. Ahead of the crisis, too little attention was paid to the risks of a swelling financial sector. Banks were allowed to operate with wafer-thin capital and liquidity buffers. That translated into an alarming lack of resilience when the crisis struck. Banking fragility contributed to a particularly severe recession in Britain because of the City’s outsize role as an international banking centre. There was a subsequent gear-change down in growth.
Skip more than a decade forward to the current energy crisis, which has caused the steepest fall in living standards on records going back to the mid-1950s. On this occasion the British economy has been especially vulnerable because of its heavy reliance on gas, which heats most homes while also generating two-fifths of electricity. Once again there has been a failure of foresight, in this instance to anticipate a violent rise in gas prices. The lack of resilience in affordable energy supply left households and businesses starkly exposed when the unexpected did occur. That has taken its toll on growth, with Britain forecast by the IMF in January to be the only G7 economy where output will fall in 2023.
The parallels with the earlier financial upheaval are striking. That crisis erupted in the autumn of 2007, when Northern Rock experienced the first bank run in Britain for over a century. The undercapitalised mortgage lender had come to rely on funding from the international markets rather than retail depositors. That was founded on the belief that it would always be possible to tap the markets. When instead they dried up, the bank ran aground.
Similarly, the government assumed that gas would always be available from international markets at reasonable prices. That was why the hapless regulator Ofgem allowed an influx of financially weak energy suppliers into the retail market, many of which failed when wholesale gas prices vaulted. That was also why the government failed to ensure there was enough storage, leaving Britain with far less than other European economies such as the Netherlands: just nine days’ capacity even after the Centrica facility off the Yorkshire coast partially reopened in October.
During the preceding Covid crisis it was Britain’s health system that failed the resilience test. The pandemic exposed woeful weaknesses in public health preparation, notably a lack of protective kit for medical staff and carers and insufficient capacity to ramp up testing when required at the outset. The disruption to non-Covid hospital activities was severe. In 2020, the number of hip and knee replacements slumped far more than in 23 EU countries reported on by the OECD, contributing to the massive backlog that the health service is currently trying to clear.
The vulnerability of the NHS stems from a long-established but risky policy of running hospitals with scarcely any slack in them. The number of hospital beds has declined for decades, leaving the NHS with just 2.3 per thousand people, one of the lowest ratios among developed economies. Admittedly, medical advances have made it possible to conduct more treatments without patients having to stay overnight. But the reduction in beds has gone too far, leaving hospitals with too little spare capacity during and since the pandemic.
There is a common pattern to all three of these crises: a mixture of wishful thinking and false economising. The wishful thinking is seen in the belief that bad outcomes are so rare that it is not worth preparing for them. After two supposedly once-in-a-century events—the financial crisis and the Covid pandemic—in less than 15 years, that premise no longer holds. The false economies are seen in the failure to invest in adequate safety margins.
The British state, once regarded as a pillar of stability, has itself become a source of crippling uncertainty
A strategy for resilience is essentially a risk-management plan. Such plans are common in the private sector. The state should start by learning from past mistakes. For the NHS, that means avoiding future staff shortages by sustaining a steady programme to educate and train medical staff. It should avoid new errors, such as the government’s foolish ambition of making Britain a crypto hub. Preparing for the adverse effects of climate change, such as more flooding, is an obvious priority. The government should look across the board at other potential risks, assessing how likely they are and what impact they might have.
Resilience should encompass the British state itself, which is unusually centralised in England. Ministers at Westminster hold sway, making it easier for them to push through sweeping changes that are all too often torn up by their successors. Further education is a prime example of how a “reform” treadmill can hurt rather than help vital sectors. A genuine transfer of power away from the centre would mean that here-today, gone-tomorrow ministers can do less harm.
Conceivably, a focus on resilience might have mitigated or even prevented Brexit, the fourth crisis of the past 15 years. What is certain is that the British state, once regarded as a pillar of stability, has itself become a source of crippling uncertainty. Pumped-up talk about growth from a government that has inflicted the economic self-harm of a hard Brexit is hard to take seriously. By contrast, businesses will be more inclined to heed a strategy that spells out in sober terms how Britain can cope better with future shocks. Indeed, such a plan may actually be the best way to foster stronger growth.
