Britain is approaching its third lost decade of economic growth, with the root cause still widely misunderstood by politicians and commentators alike.
Before 2008, the UK and US economies grew at an almost identical rate, with UK per capita trend growth at 2.3 per cent against America’s 2.1 per cent.
When the financial crash hit, both countries took a significant economic hit, but the US returned to trend while the UK never did.
This divergence explains why growth has become such a hot-button political issue, with the effects of stagnation felt from the City to Carlisle in lower wages and diminished living standards.
Many explanations for Britain’s underperformance fail to hold up under scrutiny, including the popular assumption that financial crises inevitably leave long economic shadows.
Economist Tyler Goodspeed examined 300 years of recessions on both sides of the Atlantic and found the opposite is true, with deeper contractions typically followed by steeper rebounds.
Austerity is another frequently cited culprit, yet America ran a very similar programme of fiscal retrenchment, cutting government spending from 40 per cent of GDP after the crisis back to 34 per cent by 2015.
UK government expenditure stood at 42 per cent of GDP in 2015 and has since climbed further to 45 per cent, making Britain’s spending record actually more generous than America’s throughout this period.
Planning restrictions and an overly burdensome tax system are legitimate drags on growth, but both predate the crash and therefore cannot explain the specific divergence from America after 2008.
In a new briefing for the Institute of Economic Affairs, Tyler Goodspeed argues that banking regulation is the key difference between the two economies following the Global Financial Crisis.
After 2009, successive Basel Accords required banks above certain size thresholds to hold more capital, pass tougher stress tests, and hold government bonds against thirty days of outflows.
Sovereign debt carries a zero-risk weight under these rules, while lending to a small manufacturer in Sheffield does not, making credit to the state cheap and lending to businesses expensive.
From 2010, Britain compounded the problem with a bank levy that taxed lending but exempted liabilities backed by gilts, further tilting the system against productive private-sector investment.
UK businesses rely on banks for over 60 per cent of their external financing, compared to below 40 per cent in the US, where venture capital and private equity fill a far greater share of funding needs.
Many smaller US banks also escaped the worst impacts of the Basel Accords by not meeting the size thresholds at which institutions became subject to the most demanding new rules.
Credit to the US private business sector returned to its pre-crisis level by mid-2013, while in the UK it remains 15 per cent below pre-crisis levels more than a decade later.
Before the crisis, small and medium-sized British firms saw 80 to 90 per cent of loan applications approved, but by 2024 that approval rate had fallen below half.
Without access to credit, many small and medium businesses struggle to scale, depriving the broader UK economy of a vital and consistent driver of growth and job creation.
The cumulative cost to ordinary households is stark, with the average family around £10,000 a year worse off than they would otherwise have been had different regulatory choices been made.
Britain today would rank as the poorest US state measured by GDP per capita, a striking illustration of how far the country has fallen behind since 2008.