UK economy held back by ‘rationing’ of energy, land and capital
The government must focus on “ending the rationing” of the UK’s energy, land and capital if it wants to reinvigorate the economy, according to a leading City analyst.
In a research note published this morning, Simon French, head of research at Panmure Liberum, argued that policies from successive governments had effectively created a rationing system for energy, land and capital through excessive regulation and contradictory policy choices.
“Key factors of production in the UK – energy, land, and capital – have faced a slew of policies over many years that amount to administrative rationing,” he argued.
“This has led to slower UK economic growth, pressure to raise minimum wages, declining living standards, and higher marginal tax rates.”
In economic jargon, factors of production refer to the essential inputs used in economic production. By lowering the cost of these inputs, businesses across the economy would be more competitive compared to international rivals.
High energy costs
High energy prices have been a persistent bugbear for businesses for many years, with business groups warning that they deter investment.
French pointed out that the UK’s energy policy over the past two decades had made it significantly more expensive compared to other advanced economies.
From the mid-1980s to the mid-2010s, UK electricity prices were about average among economies measured by the International Energy Agency. Now, prices are more than 50 per cent above the average.
French notes that UK electricity generation had declined by more than a quarter since peaking in 2006. He said the focus should be “enabling all forms of energy production as an enabler of a competitive business environment”.
Broken planning system
The planning system, meanwhile, has severely constrained the use of land. French described the “prohibitive” planning system as “perhaps the most longstanding of the UK’s competitive challenges”.
In particular, it has severely constrained the supply of housing. The UK has not matched the current G7 average (excluding the UK) for housing competitions per 1,000 inhabitants for more than half a century, French said.
Research from the Centre for Cities suggests that the UK has a backlog of 4.3m missing homes compared to the European average. This lack of supply has been a crucial factor in pushing up house prices relative to income.
Fifty years ago, the average house was worth four times average annual income, making home ownership relatively accessible. But, by 2024, that figure had nearly doubled to 7.7 times average income.
The planning system has also pushed up the cost of major infrastructure projects, which are more expensive in the UK than almost any other major economy.
Cost of capital ‘biggest impediment’
Finally, French argued that the cost of capital in the UK was the “least widely understood…but arguably the biggest impediment to raising the UK’s trend growth performance”.
The cost of capital for UK-listed companies is significantly higher than in European and the US, reflecting a range of different factors.
The UK’s public markets have suffered persistent outflows since Brexit. According to a Morningstar analysis, investors have pulled about £118bn from UK-focused equity funds in the nine years following the Brexit vote.
Most importantly, UK pension funds have moved their funds away from domestic equities and towards government bonds in an attempt to derisk their holdings. Pension fund allocation to domestic equities has fallen to around five per cent, down from over 50 per cent twenty-five years ago, according to New Financial.
“Sector plans and the expansion of state-administered financing is a charter for lobbyists and stretches administrative reach to breaking point. We prefer the simplicity of three simple aims – to return the costs of energy, land, and capital back to levels that make deploying these factors internationally competitive,” he argued.