The UK and other developed economies are experiencing crises of economic growth which have been building in recent decades, and which threaten to undermine the progress made on quality of life for millions over the past century. 

The best way of comparing economic growth between different countries is to look at GDP per capita and its direction of travel since it provides the clearest indication of economic trends that affect people’s prosperity. 

The Growth Commission has been set up to investigate the causes of the slowing down in GDP per capita growth worldwide, with an initial focus on the UK, and to analyse the impact of different policies on growth. 

This initial paper sets out several key findings, in particular, how: 

• Growth measured as GDP per capita in advanced economies is slowing down 

• The slowdown is even more dramatic in Western European economies

• In the post-Covid period, the UK is one of the few international economies where GDP per capita is actually falling 

Increasing GDP per head is vital not only to keeping the public finances healthy for the provision of public services but is even more important in terms of securing higher incomes for families, providing them with more spending power and thereby increasing living standards. 

Higher GDP per capita driven by productivity gains usually means higher wages and allows people to work fewer hours for higher pay. Higher productivity also generally allows economies to grow and living standards to increase without using more natural resources, so it is environmentally beneficial too. 

In recent years, Europe has fallen back relative to the US. UK GDP per capita has fallen from around 77% of the US figure in 2017 to about 70% today. Over the same period, German GDP per capita has fallen from around 89% of the US figure to around 83%. One of the tasks before the Commission is to understand why European economies have performed less well than the US economy during this period. 

As of today, UK GDP per capita is £36,568, compared to £52,996 in the US. The average American is earning a third more than the average Briton, roughly a £10,000 gap in annual spending power between the two, which represents a difference of £24,000 between the average household in the UK and the US. How many extra home improvements are Britons’ transatlantic cousins able to afford each year? How more regularly are they able to buy new cars and other consumer durables, take holidays or eat out together?

If over the next two decades the UK economy could achieve annual GDP per capita growth of 3% – as was achieved in the UK in 1950s and is currently being achieved in a country like Poland – the economy would be 65% bigger by 2040. This translates in today’s money to nearly £15,000 more for each person to spend each year; and additional tax revenues of £670 billion. These are revenues which can be spent on public services or provide the fiscal headroom for a Chancellor to cut taxes by around two fifths against current levels. Either, or more likely a combination of these, would represent a substantial improvement in our lifestyles. 

The Asda Income Tracker shows that after paying for essentials, the average UK household’s disposable income fell by £36 a week during 2021 and 2022; but this loss (of £1,900 a year) would be dwarfed by the gains achieved if the economy returned to growth, relieving the cost of living pressures faced by families. 

A significant element of the Growth Commission’s work will be building a suite of dynamic models that analyse the long-term impact of policy decisions on growth and tax revenues over 5, 10 and 20 years, first in the UK, with a view to expanding to other advanced nations. 

The analysis produced by these dynamic models will then be used in our pre- and post-fiscal event reports. 

The Growth Commission will also produce regular research publications looking at specific policies – e.g labour, housing, health, trade and competition – to establish how growth is impacted by decisions made in these areas. 

In addition, the Commission will look at: the size of government, and taxes and spending, to see the extent to which the rise in the size of government has contributed to the stagnation of growth; how demographic trends have impacted growth; the different trends in productivity in individual sectors, including public services. It will also explore the extent to which changes in productivity trends can be explained by structural changes and the impact on growth of regulations (both environmental and otherwise) and market distortions.

The author is co-chairman of the Growth Commission and deputy chairman of the Centre for Economic and Business Research. The Commission, which was convened by Liz Truss, launched its first report today: “The Growth Challenge: The decline in GDP per capita growth in advanced economies.” This is the foreword to the report.