Running on Empty: Inside Britain’s Generation-Defining Productivity Collapse

Decades of neglect, underfunding, and the pursuit of short-term gains by successive governments have stunted development and eroded business confidence.

The British economy has been plagued by a combination of stagnant productivity, financially burdensome zombie companies, and high streets increasingly dominated by low-value businesses, that have together threatened the country’s long-term viability. At the heart of this issue is productivity paralysis, marked by a persistent slowdown in productivity growth that represents perhaps the most significant yet underappreciated economic challenge facing the nation.

Since 2019, UK productivity has grown at an average annual rate of just 0.5%, a far cry from the 2-3% growth rates seen in previous decades, resulting in a widening gap between Britain and its international peers. The true costs of this productivity stagnation are substantial, representing not only lost personal income for workers but also diminished tax revenues, reduced business investment, and weakened international competitiveness. However, the root causes reflect both long-standing structural weaknesses and more recent policy failures that have combined to create a perfect storm of economic underperformance that collectively undermines Britain's future.

A Nation Running on Empty

It should come as no surprise that there has been chronic underinvestment in infrastructure, research and development, and skills training that has left many businesses unable to compete effectively in the increasingly sophisticated global market. Our financial system has prioritised short-term returns over long-term productive investment and has directed capital towards property speculation and financial engineering rather than the productive capacity needed for sustainable growth. Furthermore, trade uncertainty has hampered business planning and reduced investment in forward-looking projects, with the UK's international competitiveness continually being eroded. This is particularly prevalent in high-value-added sectors that drive innovation and future growth, making it increasingly difficult to attract and retain the investment and talent needed. Additionally, educational and training systems have struggled to provide workers with the skills required for an evolving economy, creating mismatches between labour market needs and available talent, further constraining productivity growth.

The consequences of this productivity slowdown are far-reaching, creating a vicious cycle of lifelessness that translates directly into stagnant wages for many workers and widening inequality, creating the longest squeeze on living standards in over a century. Additionally, public services have faced funding constraints as tax revenues have grown more slowly than anticipated, forcing difficult choices between tax increases and service reductions that further undermine economic potential. However, what makes this situation particularly alarming is not merely the statistical evidence of decline but how this has created a pervasive sense of insecurity and diminished expectations. Many Britons now accept this as an inevitable future of limited opportunities and constrained prosperity that would have seemed unthinkable to previous generations accustomed to steadily rising living standards.

Zombie Companies Draining Britain

The rise of so-called zombie companies represents one of the most concerning developments within the UK economy, as these are businesses that generate just enough cash to continue operating but lack the resources to invest in growth, innovation, or expansion. It was recently found that almost 16% of UK mid-market businesses are deemed to be at risk of being or becoming zombie companies. However, certain sectors are more vulnerable to this phenomenon, with nearly a quarter of leisure and hospitality businesses falling into this category as many are still struggling with the aftermath of the pandemic. This growing proportion of lifeless companies within the broader economy increases the potential for cascading failures should conditions deteriorate further or financing tighten beyond current levels. However, the wider concern is that these companies, while avoiding immediate failure, are occupying market space without contributing to the innovation or growth of the economy as a whole, further fuelling Britain's productivity challenges.

Illusion Of High-Street Prosperity

Despite many of the economic issues plaguing the country being intangible, the transformation of the UK high street provides the most visible manifestation of Britain's hollowing. Traditional retailers, service providers, and community institutions have increasingly been replaced by a specific set of businesses that create an appearance of commercial activity but mask deeper economic weaknesses. This visual transformation is particularly striking when walking through a typical British high street, with closed shopfronts interspersed with low-value extractive retail, creating a façade of prosperity that conceals the reality. Many of the businesses that now dominate high streets operate on thin margins, offer primarily low-wage employment with limited advancement opportunities, and may engage in questionable business practices that generate cash flow without creating substantial economic value.

This reality of falling local financial resilience and lost opportunity is symptomatic of many communities across Britain, especially in the most economically deprived regions. These high streets have seen more dramatic hollowing, with greater numbers of lower-value service businesses that provide limited economic benefits to local communities and fail to generate the tax revenues needed to support public services. Consequently, this not only shapes the physical appearance of local high streets but fundamentally alters the life chances and economic security of millions of Britons, creating a divided nation where opportunity and prosperity depend increasingly on geography.

A New Vision for British Trade

As Britain navigates its post-Brexit economic identity, trade policy has taken on renewed importance in determining the country's future and addressing this hollowing that is threatening its financial longevity. However, an effective trade policy will require balancing multiple competing priorities, including an openness to global markets, protection of domestic industries, and promotion of regional economic development. The UK currently maintains various trade remedy measures to address unfair trading practices by other nations, yet these represent a reactive rather than strategic approach. These policies fail to address the fundamental challenges facing British industry in an increasingly competitive and fragmented global market.

As major economies adopt more protectionist trade policies, the UK may need to develop a more comprehensive approach to trade that actively supports and protects key industries while maintaining appropriate international engagement. Beyond defensive measures, there is an opportunity to develop a more strategic set of policies that identify and support sectors where the country has or could develop a comparative advantage. From the outset, policymakers must ensure that trade policies contribute to addressing economic hollowing out rather than exacerbating existing vulnerabilities that remove support for British industries.

The Long Road To Rebuilding Britain

Many of the UK's economic challenges lie in a persistent underinvestment in capital, infrastructure, and skills that has contributed to the current productivity slowdown. This investment deficit has accumulated over decades, creating a substantial gap between Britain and its international competitors despite periodic pre-election policy initiatives aimed at addressing the problems. Furthermore, the issue is not merely the quantity of investment but also its quality and distribution, as this has too often flowed to sectors promising quick returns rather than those with long-term growth potential. However, changing this approach will require an element of policy stability and effective delivery mechanisms that have so often been lacking. The frequent changes in policy direction by successive governments continually undermines business confidence and discourages the long-term investment needed for true growth.

This will require a more coherent approach to governance that moves beyond ideological commitments and short-term political point-scoring. There needs to be a focus on evidence-based policies that address fundamental structural weaknesses and build on Britain's enduring strengths in areas like higher education, creative industries, and scientific research. Policymakers must overcome the complacency that has characterised much of Britain's approach to these challenges, recognising that without significant intervention, the hollowing of the economy will continue. It is important to remember that the country still has significant strengths, including world-class universities, a strong financial sector, and a skilled workforce in many areas, yet a continuation of current trends risks not only economic stagnation but also social and political fragmentation. Despite the challenges, there are reasons for optimism about the UK's economic future if the right policies are implemented with consistency and a strategic vision, however, without significant intervention, the hollowing of the economy will continue, with the struggles only worsening for the next generation.