UK's Stagnant Growth: Bank Regulation Blamed for Divergence from US
UKPulse Money Desk
New analysis suggests stringent banking regulations implemented after the 2008 financial crisis are a primary factor in the UK's lagging economic growth compared to the United States. This divergence has contributed to Britain now being significantly poorer than America on a per capita GDP basis.
- UK's per capita economic growth has stalled since 2008, unlike the US which returned to pre-crisis trends.
- New research attributes this divergence primarily to post-crisis banking regulations.
- Austerity measures and pre-existing issues like planning rules are not seen as the main cause for the UK-US gap.
- Tighter bank capital, leverage, and liquidity rules in the UK made lending to businesses more expensive.
- Britain's bank-dependent economy was more acutely affected by these regulatory changes than the US.
- The UK is now estimated to be 40% poorer than America on a GDP per capita basis.
The UK's failure to rebound to its pre-2008 growth trajectory, unlike the US, has left Britain 40% poorer than America when measured by GDP per capita. According to a briefing by Tyler Goodspeed for the Institute of Economic Affairs, tighter banking regulation is behind this divergence.
A review of economic data reveals that before the global financial crisis, the UK and US economies grew at similar rates, with per capita trend growth averaging 2.3% in the UK and 2.1% in the US. However, following the crisis, while the US economy largely returned to its trend growth, the UK did not.
Several theories have been put forward to explain Britain's economic woes, but analysis suggests that financial crises alone do not account for the specific gap with America. Austerity measures are also ruled out as a primary cause, as the US implemented a similar programme of fiscal retrenchment, reducing government spending from 40% of GDP after the crisis to 34% by 2015. In contrast, UK government expenditure remained at 42% in 2015 and has since risen to 45%.
The research highlights significant changes in bank regulation post-2009, including successive Basel Accords that mandated banks above certain thresholds to hold more capital and undergo rigorous stress testing. Sovereign debt was assigned a zero-risk weight, unlike lending to businesses. Liquidity coverage rules further compelled banks to hold government bonds against potential short-term outflows.
The cumulative effect of these regulatory changes had a profound impact on Britain's economy due to its reliance on bank lending for business finance. While the bank levy introduced in 2010 taxed bank lending while exempting liabilities backed by gilts, lending to SMEs and other businesses became more expensive and challenging as a result.
Why this matters: This analysis provides a new perspective on Britain's prolonged economic stagnation, directly impacting living standards, wage growth, and job opportunities for UK households. Understanding the root cause is crucial for policymakers aiming to boost the country's economic performance and improve prosperity.
What this means for you: What this means for you: This research suggests that the cost and availability of credit for UK businesses have been constrained, potentially limiting job creation and wage increases. For savers, the broader economic stagnation could impact investment returns, while for mortgage holders, the health of the banking sector indirectly influences lending rates, though the Bank of England's base rate remains the primary driver. Investors should consult a qualified financial adviser before making any investment decisions.