Mountain climbing

When it comes to living standards, GDP per person isn’t everything. But in the long run it is almost everything. In this context, there is a welcome consensus across the political spectrum on the need to tackle the UK’s dire growth performance as a route to boosting incomes. To its credit, the Government has made improving growth its defining mission. So, 18 months into the new Parliament and two years after the landmark Resolution Foundation-CEP Economy 2030 Inquiry, in this report we consider how the UK’s growth challenge has changed, evaluate the Government’s policy response, and dive into three areas where the Government can and should go further.

By Q3 2025, GDP per person had risen by just 0.8 per cent since the pre-pandemic peak – just 0.1 per cent per year. This compares to 1.3 per cent each year even in the disappointing  decade for growth that preceded the pandemic. So, the economy has taken six years to grow as much as we would have expected in roughly seven months based on the previous pre- pandemic trend. Over this period, the UK was hit hard by the global shocks of Covid and high energy prices, and we had our own home-grown crisis in the form of Brexit. As a result, the  UK’s GDP per person has fallen even further behind in the past five years and is now just behind that in Italy, having been 8 per cent larger than it before the pandemic.

The key driver of the UK’s mediocre GDP – both in terms of levels and growth – is not how much work we put in, but how much we get out. Output per hour worked is 10 per cent higher in France and 18 per cent higher in Germany. The UK’s low investment rate – the lowest in our comparison group of 20 highincome countries – has long shouldered a big part of the blame, explaining all of the productivity gap with France, for example. But, especially since the pandemic, the efficiency with which the UK’s resources are used – known as ‘total factor  productivity’, or TFP – has also performed poorly. Official estimates suggest that TFP in the market sector fell by 0.7 per cent in the five years to 2024, having stagnated in the years since  the financial crisis.

The good news is that – once we account for problems in measuring employment – the past year has seen something of a turnaround in productivity growth. Productivity was essentially flat between the pre-pandemic peak of Q4 2019 and post-pandemic trough of Q1 2024, but it has grown by a blistering 3.4 per cent in the six quarters after that, a rate not seen since before the financial crisis.

Consistent with this, we are seeing some signs of increased economic dynamism. In common with most high-income countries, the amount of economic ‘churn’ – that is, the extent to which firms and sectors have waxed and waned – has slowed considerably since the financial crisis with workers moving less frequently between jobs. This is bad for growth because  lower productivity firms going bust and resources moving to new, growing firms is a key driver of productivity growth. But rises in energy prices, interest rates and the minimum wage are making  it harder for low-productivity ‘zombie’ firms to survive. Following post-pandemic volatility, firm insolvencies are now running at rates not seen in a decade, and the share of jobs lost to closing firms in 2024 was the highest since 2011.

Bankruptcies and redundancies seem odd things to celebrate, but the UK economy needs more ‘creative destruction’. The small rise in destruction so far is, however, too small to  account for much of the observed productivity improvement. But we have not seen any improvement in creation of jobs or firms. This leaves the UK with an emerging unemployment  problem, with the 5.1 per cent rate the highest for a decade (outside of the pandemic). The fall in employment means that growth in GDP per person has accelerated more slowly – to 0.9 per cent in the four quarters to Q3 2025.

The Government was elected on a mandate to deliver higher economic growth and living standards. There is no ‘growth button’ a government can press in a market economy that delivers faster sustained growth. Instead, success requires the Government to make systematic improvements to the supply side of the economy in many areas for a prolonged period and hoping that the benefits turn up before an election. This is an inherently long-term process and the challenge is made harder by falling Government poll ratings and gloomy mood music around its economic policy agenda.

On paper at least, the Government has a sensible three-part framework for delivering systematic improvements to the supply side: restoring stability, increasing investment, and reforming the economy.

On stability, reforms to the fiscal rules and the return of multiyear Spending Reviews are a sensible attempt to provide more certainty and purpose to fiscal policy. Indeed, the  Government has used the additional headroom created by rule changes to reverse inherited cuts to public investment. But success on investment depends on boosting such spending in the private sector. Here the Government has introduced measures to support this, including pension fund reforms, publishing new Trade and Industrial Strategies and by delivering on its promise of corporate tax stability.

Alongside this, the Government has pursued supply-side reforms, including on regulation – with a particular focus on planning, where businesses report the greatest regulatory complexity – and skills provision. The Government has set itself a highly ambitious target of reducing administrative costs for businesses by 25 per cent by the end of the Parliament. On planning, it has taken several steps towards liberalisation, with its latest proposals to revise the National Planning Policy Framework particularly ambitious and well-targeted. In parallel, the post-16 education and skills white paper has rightly prioritised young people not in education, employment or training (NEETs), as well as the ‘missing middle’ of intermediate skills.

But, although there has been important progress against all three pillars, there have also been significant missteps.

Tight fiscal headroom, self-imposed constraints on major taxes and major fiscal policy reversals – which between 2025’s Spring Statement and Budget were the second largest in the past 13 years (beaten only by those in the aftermath of Liz Truss’s minibudget) – have hampered the Government’s drive for stability. This high policy volatility has contributed to levels of  economic policy uncertainty not seen since the mini-budget. Meanwhile, much of the additional spending capacity on public investment has been gobbled up by the country’s defence  budget. This is understandable in the current global environment but has severely limited the extent to which the Government has been able to invest in growth-enhancing infrastructure.  This has left capital spending on transport and research and development, for example, flat or falling as a share of GDP by 2029-30, despite evidence of their importance for productivity.  And on private investment, measures have had little visible effect, with business surveys pointing to continued weakness in investment intentions and investment growth falling to around 1 per cent, compared to 5 per cent at the time of the election.

Overall, policy has delivered some meaningful progress but has been too timid and slow given the scale of the challenge, with adverse external shocks further compounding the task. In this context, there are three key areas in which we believe the Government could be bolder: trade, housing policy and driving up labour-market participation.

Trade is one of the clearest gaps between the Government’s growth ambitions and its policy delivery. There is plenty of evidence that trade is a powerful driver of productivity and growth. But it is also where Ministers have so far ducked some hard political choices. This is most evident in the UK’s relationship with the EU. Here, the Government has taken steps to ease some of the most damaging post-Brexit frictions, pursuing new agreements with partners such as the US and India. But these moves do not come close to the potential gains from materially closer EU integration, in the form of a single market for goods, where trade has been most damaged postBrexit. This sits uneasily with the Government’s growth agenda, given emerging evidence suggesting the hit from Brexit could already be close to double the 4 per cent impact assumed by the OBR.

If this sort of deeper EU integration remains politically out of reach, the Government needs a clearer and more ambitious ‘plan B’ for trade and growth. That means putting services liberalisation at the centre of its strategy, reassessing the UK’s relatively high default (Most Favoured Nation, or ‘MFN’) tariff regime, and using trade-defence instruments where  necessary to manage risks from global disruption.

Finally, regulatory autonomy should be used more strategically. Prioritising alignment in highly traded, EU-dependent sectors such as pharmaceuticals and chemicals, while using agility where it can genuinely raise productivity – particularly in digitally-delivered and innovation-intensive sectors like fintech and biotech. Overall, a pragmatic mix of openness, targeted protection, and smarter, faster regulation offers the most credible route to trade-led growth in this Parliament.

Increasing housebuilding directly pushes up the country’s shortterm output. But it can also have a longer-run impact on growth by allowing workers to move into more productive jobs.  Here the Government’s approach is the right one: reform the planning system to make it clearer, more rules-based and better resourced, thereby allowing developers to build more homes more quickly. Nonetheless, the manifesto pledge to deliver 1.5 million new homes in England seems likely to be missed: every region is set to undershoot its housing targets, reflecting headwinds from higher rates, rising construction costs, and regulatory changes. The situation in London is particularly bad, where housing starts have hit a 20-year low.

Given this, the key test for the Government is whether its reforms deliver a higher, sustained housebuilding equilibrium, getting houses built in high-productivity areas, or in those which  will be in future. To achieve this, the Government needs a London specific ‘delivery package’ alongside national planning reform, most obviously by streamlining the functions of the new  Building Safety Regulator. The Government should also address capacity issues in the planning system, support greater densification in urban and well-connected areas, reduce avoidable regulatory costs and accelerate the delivery of up-to-date local plans.

And if the Government wants sustainably higher output – including affordable and social housing – it needs clearer ambition for the public sector’s role, with funding to match. This should  include establishing development corporations with the firepower to build a new generation of new towns.

Trade and housing boost GDP largely through productivity. The other driver of GDP per person is employment, and employment boosts can provide living standards growth focused on lowerincome families. Here, the Government’s aim of raising the employment rate to 80 per cent is ambitious and would take us to the international frontier (the UK rate of 75.3 per cent
in November 2025 is already better than average among rich countries).

But it is possible to go further. Countries like Switzerland, Germany and the Netherlands show us where progress is possible, and how fast it can be. These strongest performers typically have higher employment rates among young people, and those at the end of their working lives. So this is where the Government must focus, in part by improving health and skills among  these groups. Extra employment would likely be disproportionately part-time workers, but could still boost GDP per person by over 3 per cent.

While hard to achieve, the economic prize for success in these three areas – trade, housing and labour supply – is huge. Bold planning reforms that enable our major cities to hit their housing targets, deeper alignment with the EU and reaching an 80 per cent employment rate could together boost annual growth (in GDP per head) by 0.6 percentage points –  increasing projected growth by more than half. Achieving this would deliver a £2,000 boost to household incomes and enough tax revenue, for example, to increase the NHS Budget by a quarter.

But despite the potential for large gains in these policy areas, the development of growth policy must continue. The economy is more like a garden than a construction project: it must be nurtured and coaxed and will always be subject to the weather. But as the Government seeks to coax growth upwards, it should exploit available policy tools as effectively as possible. This paper offers a framing for the tools of future growth policy: liberalisation, incentives, provision of complementary factors, direction and pressure. And action is needed because, despite some promising policies and the ‘green shoots’ in the data, the UK’s growth policy challenge remains immense. We may have ascended the foothills, but there remains a mountain to climb.