Britain's Political Instability and Economic Stagnation: A Deep Dive

LONDON — The weirdest thing about weeks like the last one in Westminster is ... they don’t feel that weird anymore.

A deeply unpopular prime minster, blamed by his party and country for failing to meet the standards expected of a leader — and, worse than that, for failing to lift the life chances and mood of ordinary voters — was subjected to a now-ritualistic rejection by his own MPs and senior allies.

A leadership challenge looms. Keir Starmer, weeks after securing his 2024 landslide election win, promised to be honest with voters about “how tough this will be. And frankly, things will get worse before they get better.”

He already looks doomed.

If Starmer falls, he’ll be Britain’s sixth prime minister in 10 years and yet another to fail in what is starting to look like one of global politics’ least desirable jobs.

The latest turn of the leadership merry-go-round has prompted soul-searching in Britain.

Is the country now effectively ungovernable? Is there a magic formula to turn things around? And most importantly, what on earth happened?

Britain, a G7 economy and former global hegemon, is increasingly a picture of political instability and economic stagnation. It is buffeted, like so many others, by winds blowing from greater economic or military powers like America, China and Russia — and has a set of problems all its own.

One thing is obvious: Andy Burnham, Wes Streeting or whoever ends up doing the job next might find it just as hard as Keir Starmer has to make anyone happy.

Things can’t only get better

It wasn’t always like this.

The last Labour prime minister to win big before Starmer was Tony Blair. When he came to power in 1997, the U.K. had a bigger economy than China’s, was a leading member of the growing European Union trade bloc, and was approaching peak oil and gas production in the North Sea. Blair led Britain for 10 years.

Nearly three decades on, Starmer inherited a country that has never really recovered from the economic shock of the 2008 financial crisis, is menaced by Russia, and now relies on imports for its energy security.

It has found no lasting remedy for the resentment felt by many communities (outside London, the still-flourishing finance capital) who — over several decades — have seen traditional manufacturing roles move inexorably overseas. as the global economy tilts towards China and other rising powers.

“We had a pretty incredible run from the mid-to late-1980s, through the 1990s, until the [2008] crash,” said Jim O’Neill, a former chief economist at Goldman Sachs and an ex-Treasury minister, who coined the term “BRICs” to describe the economic powers that challenged a Western world order Britain helped to build.

That was when everything changed, O’Neill argued. “The country’s had a dreadful productivity performance since the financial crisis,” he said. “That links to the … absence of real wage growth and exaggerates the feeling of those that have been left behind by historic decline of manufacturing.”

Paul Johnson, former director of the influential Institute for Fiscal Studies think tank, concurs, writing in the Times last month that Britain’s problems can be sourced back to low growth and income inequality, especially between London and the rest of the country.

“Two decades of economic stagnation have baked in frustrations kept in abeyance when most people were enjoying improvements in their living standards — as they were until the mid-2000s,” he wrote.

Brexit and all that

It’s not all doom and gloom.

British universities are still globally renowned centers of research, and have given the country a fighting chance of riding the waves of AI and tech revolution to economic growth, albeit as a minnow compared to the U.S. and China.

But the country has also suffered the economic shock of Brexit, a fumbled response to the COVID pandemic, two energy crises sparked by wars in Ukraine and Iran, plus an aging population demanding ever greater sums of public money on welfare and healthcare.

It is a recipe for a low growth, high-spending country that is increasingly viewed dubiously by international financial markets — and with darkening prospects.

Government debt has continued to ratchet higher, blowing up after the 2008 bank bailouts and COVID. Borrowing rates are at record highs, further constraining government coffers.

Politicians, as the short-time former Tory Prime Minister Liz Truss found out so disastrously, are increasingly at the mercy of the bond markets.

Under Labour, Chancellor Rachel Reeves has made growth the core plan of her time in No. 11. She’s pursued tax rises to fill holes in the budget while promising deregulation to help business, in a bid to attract more private cash into the economy.

Things were even starting to look up. The Bank of England began to cut interest rates.

But the Iran war changed all of that. “Unfortunately, this [conflict] means inflation is now higher than we expected and will probably rise further this year,” the Bank said last month — making life even harder for millions of Brits. The country could be harder hit than many other countries.

The new Italy (or the new Greece)

Given the economic backdrop, it’s perhaps no surprise voters have been quick to fall out love with their leaders. When Conservative Prime Minister David Cameron fell on his sword after calling and losing the Brexit referendum, it ushered in a period in which no PM has lasted longer than three years.

It is parties offering quick and direct solutions — slashing immigration, as Nigel Farage’s Reform pledge, or soaking the wealthy with taxes, as the Greens propose — that now win a hearing with voters.

It used to be Italy that endured the unhappy status of Europe’s political basket case, cycling through prime ministers quicker than Premier League football teams switch coaches. Now, Italian Prime Minister Giorgia Meloni is nearing her fifth year in office, during which she’s had three (likely soon four) British counterparts.

But O’Neill, the former Treasury minister, compared the U.K. with another European country: Greece.

The U.K., he pointed out, now has “significantly” higher 10-year bond yields — a benchmark of borrowing costs — than Greece, a decade on from the latter’s sovereign debt crisis.

By contrast to the ailing U.K., Greece is “currently the fastest-growing place in Europe … and that’s happened because they had to make some dramatic changes because of the pressure that financial market put Greece under,” he said.

Like Greece, “it might need a genuine financial crisis to force [U.K.] policymakers to stop living in dream world,” he added.