UK economy faces deep structural weakness, says Institute for Government
Britain’s public finances are in a far more fragile condition than official projections suggest, according to a new analysis by the Institute for Government that paints a stark picture of an economy struggling to deliver the tax revenues needed to fund basic state functions.
The think tank’s latest report, part of its ongoing “precarious state of the state” series, warns that sluggish growth, an ageing population, and years of underinvestment have combined to hollow out the UK’s fiscal foundations in ways that no single budget can easily fix.
Growth that isn’t growing fast enough
The numbers tell a difficult story. UK GDP growth has averaged just over 1% annually in real terms since 2010, well below the post-war historical average of around 2.5%. That gap matters enormously when you’re trying to fund the NHS, cover debt interest payments that now exceed £100 billion a year, and rebuild creaking public infrastructure at the same time.
But it’s not just the headline growth figure. Productivity — the real engine of long-run prosperity — has been essentially flat since the 2008 financial crisis. That’s more than fifteen years of near-stagnation. Other comparable economies haven’t done much better, but the UK’s particular combination of low business investment, weak export performance, and a housing market that misallocates capital on a massive scale makes the outlook distinctly uncomfortable.
The tax and spend squeeze
The government is already collecting taxes at their highest share of GDP since the 1940s. And yet it still can’t balance the books. That tension — record tax take, persistent deficits — is at the heart of what the Institute for Government identifies as the structural problem. Spending on health and social care alone has risen by roughly 40% in real terms over the past decade, crowding out investment in everything from roads to courts to job centres.
“The state is doing more than it ever has, but in many areas it’s delivering less,” one senior policy analyst told reporters at the report’s launch. “That’s not a political point. That’s just what the data shows.”
Still, the government insists there’s a path through. Treasury officials point to the Office for Budget Responsibility’s forecasts showing debt stabilising by the end of the parliament. Critics say those forecasts rest on assumptions about growth that look optimistic at best.
What comes next
The Institute for Government stops short of prescribing specific remedies, but it does make clear that tinkering around the edges won’t cut it.
Reforms to planning law, skills training, and public sector productivity are frequently cited as priorities. So is a more honest public conversation about what the state can realistically afford to do.
The next spending review, due in the spring, will be the first real test of whether ministers are willing to confront these structural realities head-on or paper over them with yet another round of short-term fixes. Given the scale of the challenge the Institute has laid out, the stakes couldn’t be much higher.
