Government must ramp up not run-down its own growth strategy and be far bolder on trade and planning reform

The UK economy has been falling further behind its former peers but could be on the brink of a turnaround, emphasising the need for the Government to ramp up rather than run-down its economic growth strategy, according to major new Resolution Foundation research published today (Monday).

As the Chancellor joins other heads of state at Davos, the report Mountain Climbing takes stock of the UK economy and the scale of the challenge it faces.

The authors warn that the UK’s poor post-financial crisis economic performance has continued well into the 2020s. Its GDP per head is now level with Italy, having been 8 per cent higher back before the pandemic. And having closed the gap with the average of Australia, Canada, France, Germany and the Netherlands to just 5 per cent in 2005, the UK is now languishing 15 per cent behind its former peers.

There are signs that the UK economy may be turning a corner however, with (accurately measured) productivity growing by 3.4 per cent over the past 18 months (Q1 2024-Q3 2025) – more than the previous seven years combined. The Government’s next steps could help to determine whether this really is a turning point for the UK economy, or another false dawn for stronger growth.

The report says the Government’s three-pronged strategy of restoring stability, increasing investment and reforming the economy is the right one for the challenges Britain faces.

Progress has been made on all three, from new fiscal rules, to powering up public institutions like the National Wealth Fund to crowd-in private investment, to stabilising the country’s corporate tax regime. But the Government has spent much of the past 18 months running down its own plans.

Despite pledging to restore stability, policy uncertainty has been higher in this Parliament than any of the previous seven, while the Chancellor has announced £6.1 billion of U-turns – second only in scale to the reversal of the Truss-Kwarteng ‘mini-Budget’ over the past 15 years.

Public investment has been put on firmer footing. But ramping up capital spending on defence, while understandable in the current environment, has crowded out spending on economic infrastructure like transport and R&D, which is not set to rise as a share of GDP across the Parliament.

The report identifies planning reform, trade and the labour market as areas where the Government needs to be bolder.

Planning reforms have not yet led to more homes being built. This is especially true in core cities and the capital, where housing starts have fallen to a 30-year low. Ministers need to finalise the National Planning Policy Framework, stabilise the Building Safety Regulator without undermining safety, and establish development corporations with the necessary financial firepower to build new towns.

The biggest area for potential growth lies in trade, and in particular reversing some of the damage from the Trade and Cooperation Agreement with the EU. Pursuing deeper EU alignment, by replicating the Northern Ireland customs arrangements across the UK, could reverse around one-quarter of the economic damage of Brexit, twice the India, US and EU-UK reset deals combined.

But as the Government has ruled out this strategy, a bolder Plan B is needed. Future trade policy should be more focused on services, reducing its high default tariff regime and actively pursuing areas of regulatory alignment with the EU (in pharma and chemicals) as well as divergence (in fintech and biotech).

Efforts to boost growth must also be employment-rich if they’re to lift living standards too. While the UK’s employment rate is above average compared to other rich countries, the report calls on policy makers to address its two weaknesses – lower employment for the under 25s and over 50s. This holds the key to the UK reaching an 80 per cent employment rate.

While hard to achieve, the economic prize for success in these three areas is huge. The report finds that together they could boost annual growth in GDP per head by 0.6 percentage points over the next decade – increasing projected growth by more than half. Achieving this would amount to a £2,000 boost to household incomes and allow the NHS Budget to increase by a quarter.

Greg Thwaites, Research Director at the Resolution Foundation, said:

“Twenty years ago, the UK economy was close to catching up with Germany. But decades of stagnation mean that we’ve now been caught by Italy and are miles behind our former peers. It’s time the UK started to catch up.

“There’s lots to welcome in the Government’s economic growth strategy. But it has spent much of the past 18 months undermining that strategy with policy U-turns, kite-flying tax ideas and timidity in areas like trade where it needs to be bold.

“With signs that productivity may be turning a corner, the Government must capitalise by ramping up its plans. It should redouble efforts to unblock housebuilding in major cities, focus job support for young and older workers, and decide whether to bite the bullet and reverse some of the damage from Brexit.”

Notes to Editors

• Embargoed copies of Mountain Climbing by Elliott Christensen, Nye Cominetti, Sophie Hale and Gregory Thwaites are available from the press office.
• The report comes two years on from the publication of Ending Stagnation by the Resolution Foundation and Centre for Economics Performance at the LSE. Copies are available here.