​5 Hard Truths About Our Economy (that politicians won't publicly tell you)

Key insights drawn from a talk by former House of Commons leader Jacob Rees-Mogg focus on the self-imposed policies holding the UK back
 
It is easy to feel frustrated with a stagnant economy. We are often told that the solutions are complex, caught up in political debates that seem to go nowhere. But what if our economic stagnation boils down to two specific, decades-old pieces of legislation: one from the 1940s that dictates where we can build, and another more recent one that dictates the cost of our energy?

We explore here a handful of surprising truths about our economy, very much not the usual talking points. They are the consequences of two foundational policies - the Town and Country Planning Act and the Climate Change Act.

Expensive energy is shrinking our economy
For the last 30 years, driven by the Climate Change Act, a core policy in the UK and Europe has been to deliberately make energy more expensive. This decision has had an extremely negative effect on our relative prosperity. In the year 2000, the UK’s GDP per capita was 90% of that in the United States. Today, it has fallen to just 60%.

​The most significant divergence between the two economies over that period has been the cost of energy. While US energy prices remained relatively low, UK electricity prices are now roughly four times higher. Energy is the engine that powers every factory, office and home. By intentionally raising its cost through climate legislation, we have effectively put a brake on our entire economy, making every industry less competitive on the world stage.

Post-war planning laws are keeping us in smaller homes
Another self-imposed barrier to growth is the Town and Country Planning Act of 1947. Originally conceived by the government as a way of planning, building and owning housing, the more ambitious and potentially detrimental elements of the ‘build and own’ aspect were never fully realised. What remained, however, were the planning restrictions, and they have fostered a system that has had a profound and surprising consequence: the UK is the only major economy in the world where the size in square feet of an average property – including outside space - has actually declined since the Second World War.

This is not because people want smaller homes. Polls consistently show that the majority of people want to live in houses with gardens. The trend is a direct result of a planning system that makes it incredibly difficult to get permission to build. This incentivizes developers to squeeze as much as possible into the smallest available space, leading to the proliferation of tower blocks. The impact of this legislation extends beyond the residential. A Bristol-based 3D printing company is considering moving to the US simply because it foresees a five-year wait to get permission to expand its factory.

Cooking food gave us bigger brains - and it is all about cheap energy
Andrew Jenkinson’s book Why We Eat (Too) Much offers a fascinating insight into the role of energy in human development. It argues that humans developed the largest brains among all animals because we learned to cook our food. The process of cooking essentially "pre-digests" food, which frees up enormous amounts of metabolic energy and blood supply that would otherwise be used for digestion. This surplus was then diverted to the brain. This principle - that harnessing cheap energy is the key to progress - is a constant throughout history. The Industrial Revolution in the UK wasn't a random event; it was an innovation driven by necessity. Having already used up its most easily available energy source by chopping down its trees, the country was forced to develop the more complex technology to extract and use coal. This clever harnessing of a new energy source precipitated unprecedented economic growth and progress.

Excessive regulation kills competition
While everyone complains about bureaucracy, its most damaging economic effect is often hidden from view. High regulatory costs create enormous barriers to entry for new businesses, which stifles the competition that keeps an economy dynamic and innovative.

A perfect case study is the investment firm Somerset Capital Management. When it was founded, its break-even point was £250 million in assets under management. Due to the explosion in regulatory costs since then, a new firm starting today would need AuM of over £1bn just to break even. While these high costs protect established players from new challengers, they ultimately harm the entire economy by preventing new, competitive businesses from ever getting off the ground.

You need to earn £71,000 to be better off than on benefits

Perhaps the single most shocking statistic is the reality of the welfare trap in the UK today. The system of benefits and taxes has created a situation where, for a person with three children, they need to earn a salary of £71,000 a year just to be better off working than they would be on benefits.
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This statistic highlights a profound problem with our society's incentives. When the financial reward for entering the workforce is so heavily penalized, it completely disincentivises people. It calls into question whether our current system really encourages work, self-reliance and economic participation.

Are we ready for the answers?
The common thread through all these issues is that many of our biggest economic challenges are the direct results of our own policies. Restrictive planning laws and onerous levels of regulation are both examples of bureaucracy stifling organic growth. The welfare trap removes the incentive for individuals to participate in the economy, while the deliberate policy of expensive energy makes the entire system uncompetitive. As the story of human evolution shows, this last point may be the most critical of all.

This raises a powerful and uncomfortable question for all of us. If these self-imposed roadblocks are the real source of our economic stagnation, are we, as a society, brave enough to support the difficult and unpopular solutions required to remove them?