How the UK economy got stuck – and what happens next

Matthew Partridge: Your latest book on the UK economy, Challenging Inequalities: How We Got Stuck and Where We Go Next, is part of a wider project by the Institute for Fiscal Studies (IFS). How did it come about?

Paul Johnson: It was a very long-term project that started in 2018, and part of a detailed study of inequality. We published over 100 papers, overseen by a committee chaired by Nobel Laureate Angus Deaton. Each of the papers took a detailed look at one aspect of the theme – ethnic inequalities, for instance, or wealth inequality. The idea was to highlight key issues in something approaching a narrative. The book itself I co-authored with three or four other people.

Matthew Partridge: I noticed that you say if you look at some measures, such as the Gini coefficient, income inequality hasn't changed much since the 1990s. However, other measures, such as the income controlled by the 1% and 0.1%, have increased. Is this a fair summary?

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Paul Johnson: Overall income inequality rose enormously in the 1980s, only to plateau from 1990 onwards at a population-wide level. However, while inequality across most of the population didn't change, the top 1% continued to move ahead of everyone else in terms of both income and wealth until about 2008. Since then, income inequality has fallen slightly, although it remains at a very high level by historic and international standards. What's more, while raw income inequality may have peaked, other types of inequality have become more significant, including gaps between regions and generations.

Matthew Partridge: Do you think these high level of inequality have played a big part in the move away from mainstream parties to populism?

Paul Johnson: The main cause of the move away from the centre is probably the lack of growth over the last 20 years. However, the two factors interact very strongly. So, not only are people fed up because they haven't seen their living standards rise for quite a long time, but they are also angry because some people are a lot richer than they are. Certainly, the concerns around inequality wouldn't be so pressing if everyone's incomes were still rising. You can see that with the younger generation who are no longer doing better than their parents, at a time when house prices have been increasing faster than earnings.

Matthew Partridge: One of the big themes of the book is that just trying to solve inequality through more redistribution isn't going to work. Instead, you suggest something you call “pre-distribution”. Can you elaborate on that?

Paul Johnson: We made a conscious decision that the book wasn't going to go down the traditional route of suggesting how you could tweak taxes and benefits to reduce inequality, partly because the IFS has already done a huge amount of work on that. There are ways of making tax and welfare more redistributive, but they come at the cost of weakening incentives.

Most importantly, we discovered that people place more value on money they've earned themselves and having a good job than on being given handouts. So, we need to find a way that creates the sort of economy that works better for everybody. While that's easy to say and hard to do, it leaves less to tidy up afterwards.

That's why the book focuses on things that could boost productivity growth, such as early years education, family life and housebuilding, but also the regulation of big companies. However, we also talk about things such as globalisation, free trade and immigration, which generally boost economic growth, but if you take them too far they can undermine their positive impact by increasing inequality.

Matthew Partridge: Do you think that one of the problems with immigration is that, despite the promise of points-based immigration, we've failed adequately to change our system to focus on highly skilled workers?

Paul Johnson: Immigration policy has been all over the place, and even though this government has tried to tighten the rules, there are still a lot of people coming in as family members without having to demonstrate any particular skills. While I don't like calling care workers low-skilled, a lot of people took advantage of care-worker visas. Of course, if we do restrict this type of immigration, then we're going to be paying more for these types of services. Note, too, that due to the extraordinary fall in our fertility rate from 1.8 to 1.4 over the last five years, without net migration our population would start to fall.

Matthew Partridge: One of the big topics around both productivity and inequality is AI. The worry is that AI could be a double-edged sword for the UK economy in that it will boost productivity, but all the gains won't necessarily go to everyone equally; there will be many losers. Is that a fair comment?

Paul Johnson: I think there's clearly a risk of that and we are definitely seeing that in the US, where there have already been some big winners from the technology revolution. Even before AI, there was a concentration of economic rents in a small number of incredibly profitable companies, which, through a combination of very high pay and share options and so on, massively rewarded a very small number of people.

Matthew Partridge: Why has the UK economy grown significantly less than other countries over the last 15-20 years?

Paul Johnson: There are several reasons. We were more dependent on financial services than most countries when the financial crash happened. Brexit has clearly not helped; indeed, it has probably slowed things down further since 2016 and since 2021. We have invested less over a long period of time than most other countries, in both private and public terms. Our regulation and planning policies are more extreme and make it much harder to build things.

You can't pin it on any one problem, but all these factors, in addition to the general political chaos – with goodness knows how many prime ministers and uncertainty caused by various changes in direction – will have played a part.

Matthew Partridge: It seems a key danger is that the more the UK economy stagnates, the more disillusionment and political chaos ensue, causing more uncertainty and stagnation.

Paul Johnson: Yes, exactly. You can definitely get locked into a terrible vicious cycle of this kind.

Matthew Partridge: There has been much debate recently about the quality of the government's economic forecasts, which are attacked for being inaccurate or even supposedly manipulated. Reform's Nigel Farage has said he's given serious thought to scrapping the Office for Budget Responsibility (OBR). Do you think this would be a good idea, or is there a role for institutions like the OBR?

Paul Johnson: The whole point of the OBR was to get the government out of the forecasting business – because it was pretty clear that the Treasury's forecasts were politically manipulated – and hand it to an independent body. So, I'm now confident that the forecasts are honest and not manipulated. Ironically, while the OBR has been berated for being too pessimistic, on average over the last 15 years we've found that it's been slightly too optimistic. While it's strange that there are two independent forecasters, the Bank of England and the OBR, we at the IFS thinks that the UK's main forecasting institutions are in the right place, especially as the OBR mainly produces mostly fiscal forecasts and the Bank of England focuses on monetary policy.

Matthew Partridge: What do you see as the biggest fiscal challenges for the UK economy over the next ten to 20 years?

Paul Johnson: Well, I think the big fiscal challenge is that in the past ten years we've seen an unprecedented 5%-6% increase in the share of national income accounted for by taxation. Before that, taxes were for a very long time fairly flat as a fraction of national income.

I think that what people will remember when they look back at this decade isn't going to be Covid or the energy crisis, let alone the mini-Budget, but rather that the British state grew to an extent that is totally unprecedented.

What's more, all the pressures that are pushing spending upwards are going to keep growing, with the commitment to spend another 1% of national income on defence leading to another £30 billion in expenditure. Spending on health is rising relentlessly due to the aging population, with the triple lock ensuring that the same thing will happen to pensions.

Given that we've already got a very big debt pile, it's going to be quite hard to meet these commitments with additional borrowing, especially with previous borrowing coming back to bite us in the form of debt-interest payments.

Perhaps the only silver lining is that while the UK's fiscal situation is much worse than the average OECD country, our debt-to-GDP ratio isn't above the G7 average. Indeed, it is odd that we pay more on our debt than France does, even though it has a higher debt burden. However, this interest-rate disparity is at least partially explained by the fact that we've had higher inflation here for a long period of time, and markets are less confident about our ability to turn things around.

Paul Johnson was director of the Institute for Fiscal Studies between 2011 and 2025, and is currently the provost of Queen's College, Oxford. His latest book, “Challenging Inequalities: How We Got Stuck and Where We Go Next”, with James Banks, Tim Besley, Richard Blundell, Angus Deaton, Robert Joyce and Debra Satz, (Princeton University Press, £25) is out now.

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