Is the UK screwed?
I get this question has become a bit of a meme in London since Brexit, but I’m looking for serious opinions.
The UK is a really odd economy. Like the US in many ways (services heavy, big current account deficit, big fiscal deficits etc) but obviously nowhere near as successful since 2008.
It clearly has many strengths (world class education, cultural capital, world class capital city and financial center) but its politicians are in a constant love affair with socialism, and the right has a weird historic idea of the UK as still a great power. Because of this, its huge welfare state and free healthcare system are just totally unsustainable and taxes never go down. This drags it down in normal times (outside of literally just Thatcher era post-WW2).
So with UK bond yields at highs, GBP plunging again, I’d be interested to get some opinions on here whether the UK is actually screwed?
Sadly the UK is massively past its sell-by date. Like you say it's overly reliant on London as its most productive asset (finance & professional services haven't fully declined post-Brexit) but other tailwinds mean the UK isn't going to get meaningful economic growth in the near future. Other productive sectors/regions would be oil & gas in Scotland, but that's been windfalled taxed and decarbonisation means you're not going to get meaningful revenue there like you did during the 70s and 80s (even when the UK did experience some oil wealth it managed it horribly during the Thatcher years) + legislation to phase out North Sea drilling. Rents have outpaced sluggish wage growth, most grad schemes still pay largely the same as they did 10 years ago. Politically its impossible to say the NHS needs reform and other market solutions need to be implemented, throw in an ageing population, NIMBYs and triple-locking pensions means there's no room for aspirational pro-growth, pro-business policies. Crime is evermore rampant, prisons are too full to have serious criminals sentenced and since Brexit, migration has become more of an issue (when Brexit was finalised the consensus was that no one would bark about immigration anymore since Brexit had been completed) that is defining politics. When the UK was in the EU, you had decently high levels of migration but its arguable that the quality of migration under freedom of movement was higher, hard-working (mainly eastern-european) people would come to the UK, earn pounds (back when we had a strong currency) but eventually go back to their home country after 5-10 years. Cultural integration and assimilation was probably at an all time high and under cool Britannia you had imo what was healthy migration with the large majority of people making efforts to learn the language and assimilate etc. The same can't be said now, illegal crossings of the channel may be small compared to net legal migration but it's still a security/border issue. You're probably getting less cultural integration now and society that is much more divisive which is much to relent because the UK genuinely was a multicultural and tolerant society that was to be proud of. An identity crisis and scenario like this won't end overnight, an ageing population means you can't shut the borders as you need a level of immigration to fill gaps in the economy, but the balance will be so important. The only (very basic) solution i can think of is by investing in local domestic workforces and prioritising highly-skilled visas (Say certain salary requirement to be 1.5/2x of median UK salaries) to ensure immigration ends up being a net benefit to the taxpayer rather than a net cost with benefit dependents + childcare/extended families falling under this too. This already a more complex problem when you've got a high level of student visas coming to study here (some unis much more reliant on overseas students, i get this attraction when they pay 3x more fees) but degree and grade inflation means the expected payoff of a uni degree is worthless unless you're doing STEM at a top undergrad compared to pyschology from the uni of bournemouth. I woudn't be surprised if a lot of middling unis go bankrupt in the uk in the next 3-5years, whether or not that forces the government to bail them out i don't know, but perhaps a uni collapsing/going financially insolvent is the catalyst for the reset the UK desperately needs.
It’s such a tragedy what Brexit has done to the UK. Completely unforgivable and probably started a tailspin downwards that’s unstoppable.
the rot was setting in long before Brexit.
I think Brexit was a total shitshow but there's arguments that the decline happened before. I've been quite supportive of the Coalition Conservative-LibDem and thought David Cameron was the last decent PM (who governed with stability, May and Sunak had their merits but inherited a hugely divided party, Boris and Truss largely a shitshow) but austerity (imo was justified largely but did have huge consequences) sowed the seeds of revolt in the working-class areas that voted Brexit, who were naturally patriotic labour voters (socially small c conservative but very much in favour of strong public services spending) that are now being courted by reform. I still think a soft Brexit compromise could've been made but it was defeated in parliament (you had arch remainers voting alongside arch brexiteers for the same bill, brexiteers to crush being in the customs union/single market, remainers voted against it to try get a second referendum). By staying in the economic zone of the EU, you get the economic benefits (Free trade with the continental europe at ur doorstep) and avoid the federalist political union. It was about sovereignty and migration which i get to an extent. But remaining in the SM/CU means you're still tied into the 4 pillars of economic integration with the most topical one being freedom of movement. Brexiteers would not allow freedom of movement and tbf i think it needs to evolve and the EU may have to decide its no longer tenable to sacrifice border security for freedom of movement. The UK was too weak when it was an EU member to get any concessions/exemptions from FoM (you can't cherry pick). But if the EU were to end FoM in the next 5-10 years, you may have the groundwork for the UK to rejoin the SM/CU. It won't generate economic growth overnight, but i strongly think Britain's best chance of economic growth is at least by joining the SM, rather than the silly trans-pacific trade deal that adds 0.0005% to our GDP
you called it mate, Unis are closing / merging now.
Start by figuring out Rotherham, punishing those responsible, and ensuring nothing like that can happen again, and maybe the US will come bail you out again like we did in WW2.
I would say the UK is screwed more by demographics and immigration than anything. The British are a minority in their own capitol city and their politicians are enacting one of the most severe cases of anarcho-tyranny the modern era has ever seen. As they collapse on that front the rest of the country, financial sector included, will gradually sink lower and lower as they go deeper and deeper into debt. They aren't a reserve currency and don't have the same tech or resource leverage as the US so when their national debt grows it's much more damaging to their own economic wellbeing. Heap all of that onto anti-business and anti-wealthy policies from Labor and the like, and there's basically no reason for anyone other than the freeloading fake asylum seekers to want to come to the country and ride out what's left of the gravy train.
You're right, demographics and immigration are an issue...as it is for every other Western country.
But the real problem unique to Britain is that we have no answers. We can turn inwards, like the US has been doing since Biden / Trump, and focus on domestic production and issues. But we're not the US. Or we can turn outwards...but we'll have to pay via freedom of movement for people and goods. The worst answer is doing nothing. And we're great at doing nothing.
Anyways, I think the real upside is our financial sector. Yes, London is a behemoth. But we're great at producing world-class assets that are sold for cheap to international (often US) players e.g. Darktrace / Thoma Bravo. Let's keep doing that and up the price.
TL;DR Yeah.
People have been saying this since the 60s…e.g. Harold Wilson ‘managing decline’ of the country
We’ll manage tbh. We’re not innovators. We do what we can to survive.
But my problem is that we never take risk. We’re not a nation of achievers but a nation comfortable with just cruising. It’s been in our DNA since the collapse of the empire.
Just cruising isn't enough anymore for today's world. The UK cannot keep living off the wealth it created 100 years ago and stealing from the few ambitious people who are net contributors to the massive welfare state.
IMO one of the greatest untolds of this Labour Government is the amount of people out of work off-sick/growing welfare catalogue. Its not sustainable yet for obvious political reasons, no party will bother to actually make a bold and ambitious plan (obviously need some bright policy wonks to cost it and make it credible) for the next generation of younger people. Labour are borrowing/rising taxes not for investment or building infra (let's be straight, the UK is awful at building long-term infrastructure plans with bureaucratic regulation if you compare it to continental Europe, the French are quite good at it) but for public sector pay rises and higher borrowing costs. The Conservatives' main voting base is now the 65+ pensioner vote and the outrage over the winter fuel allowance being taken away (a policy that most middle of the road Conservatives would happily back) + committing to the triple lock on state pensions mean they've no radical plans to cut overbloated welfare. Lastly Reform have no economic policy either and their voter base (previous Lab voters who are deeply patriotic but are in favour of levelling up and higher public services spending) mean that no party is bothered about long-term change. This is just the tip of the iceberg when you then add in NHS spending (no plans for reform to be unveiled till 2028) and things like defence where 2.5% or even higher (3-5%) is being called for (watch how Trump will make NATO want to up this) mean the UK virtually has to take dozens and dozens of harsh fiscal measures which no one is ready to stomach.
What's that saying about the tallest daisies being the ones that get cut? It's a shockingly pervasive sentiment across all the brits I know.
Edit: angry little tea toddlers
we are dying, we are not dead
yeah consensus is UK and EU more broadly is perma-doomed
you should check out the draghi report
When the most talented people in the UK choose finance and law over engineering and medicine, you can't expect breakthrough innovations. But you will be doing just OK because existing assets are well managed.
On the other hand, people here value bird-watching and hiking more than the second car in the garage. And a high percentage of the population can afford holidays abroad. They are just happy with the life they have.
As a Brit-American who has worked in both countries, the answer to your question is yes probably (sadly). Brexit was a factor but tbh the issues are much more structural:
- Imbalance between London and the rest of the UK: if you exclude London (and surrounding commuter towns) from the UK, the country has a lower GDP per capita than rural Mississippi lol. Given that London is sadly no longer on par with New York, this is equivalent to America being a country consisting only of say Chicago surrounded by (and supporting) rural Mississippi - it's just not sustainable long-term. Plus the rest of the UK resents London despite being supported by the capital, which brings me on to my next point:
- Unrealistic expectations from the populace: the average Brit expects to have free healthcare for life, education for their kids paid for by the state, generous benefits/social assistance if they lose their jobs, and relatively extravagant government pensions that go up with inflation in retirement (the "triple-lock") - whilst not paying in enough to fund any of it. It's hard to explain how screwed up the UK tax system is in a succinct sentence, but here goes - anyone earning less than 100k pays no tax on the first 12.5k, then only 20% up to 50k, and 40% thereafter. However earners over 100k forfeit their 12.5k tax-free allowance, and then pay an eye-watering 45% above 125k.
What does this mean? Well for instance someone earning the average salary of £30k outside London, pays very little tax (i.e. (30k - 12.5k) * 20% = 3.6k which is a sub-15% tax rate in aggregate). Whilst someone earning £150k in London pays around 42% in aggregate. Yet both people in this example will use free healthcare from the NHS, get free education in their own childhood and then for their kids etc. The big problem is the guy earning £30k pays just £3.6k a year for this yet expects the world in return. He's a "net taker" like most of the country, whilst £100k+ earners are massive "net givers" - the problem being there just aren't enough of them, so taxes keep going up and up on top earners which disincentives productivity. Likewise boomers who are now retired probably paid very little into the system in overall £ terms, yet are a huge burden on the NHS and also the state in general with their generous triple-locked pensions.
No government (Conservatives or Labour) wants to tackle this as it would be enormously unpopular in their short-term, hence the can just keeps getting kicked down the road. Liz Truss did make a (disastrously executed) attempt to change this however she did far too much at once and nearly bankrupted the country, so was forced out.
- Brexit: tbh as much as I didn't want us to leave the EU, I don't think Brexit is that huge of a driver. Where it has mattered though is that it has accelerated the diminishment of London from near-NY equivalent in financial services to more like Chicago - but this only matters that much because the UK is so dependent on London to survive (in terms of tax receipts). But to blame this all on Brexit would be unfair - Europe is arguably in a worse state than the UK, e.g. France has the exact same problems that the UK has but worse (civil servants wanting to retire at 50, people not wanting to work more than 32hrs a week yet expecting very generous state benefits/healthcare), and the French government likewise is terrified of upsetting the public. Just look at how Barnier was forced out recently trying to implement some reforms.
So where will the UK be in 10-20 years? I think Italy is probably the best guide - a country that is rich in culture but has economically stagnated for decades, going from one of the biggest economies in the world to also-ran. Wages have stagnated, corruption is rampant amongst politicians leading to a loss of faith in the political system, the tax burden is so high on the top earners that illegal tax avoidance/evasion has become widespread and a point of pride rather than something to be embarrassed about. By the time the UK gets to where Italy is now, Italy itself will probably be closer to Argentina-status (assuming the EU doesn't keep continuously subsidising/bailing them out).
I don't mean to be too doom-and-gloom, but honestly the UK is on a bad path and has been for a number of years now. In fact I would say for younger people wanting to stay in the UK, arguably rather than going into IB and earning £200k a year but living in London and being taxed to death whilst working crazy hours, you're better off finding some middling job earning £60k in a LCOL part of the UK and enjoying the much lower stress and tax rates for lower earners. Which is insane to say because it means the UK will have an ever-shrinking tax base of higher earners who are paying for everything and not getting much in return. If you are ambitious then I'd say try to get to (ideally) the US or else Dubai as soon as you can, otherwise sadly the main winner from all your hard work will be HMRC rather than yourself.
Eye-opening. Thank you for the elaborate write up.
so what's your solution
Short gilts, obviously (this is not investment advice, it's an ironic statement)
It's not just the UK that's like this, you could say the same about most Western democracies tbh (Canada, France, Germany, Italy).
And housing in the UK and most Western countries is a bigger problem IMO, bigger than tax (which has always been pretty high in the UK). That a life easily bought by my seniors (kids at private school, big house in London or home counties) in finance just 20 years ago is essentially unattainable for me on almost any salary is just so disheartening. I don't want to and shouldn't have to move to Dubai or the US.
This increase in house prices has clearly been driven by QE, endless liquidity policies and the devaluing of fiat currencies which have had little democratic accountability and few know about outside of finance. The game is rigged.
Making having a family and living a middle class life being impossible to those on average salary and those who work hard is just a completely unsustainable position to be in from a society perspective and makes me worried about the future.
Agree with you on this. Tax is a major issue impacting long term productivity and international competitiveness but people would think less about taxes if housing and general quality of life could be afforded. Even if you had a substantial tax cut for high earners in the UK if anything that would be inflationary for housing as people would have more to spend.
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