Stagnant Britain is becoming like France, says World Bank chief economist

Britain’s bloated state has made the country look more like France than America in a trend that is hurting economic growth, according to the chief economist of the World Bank.

Indermit Gill said a recent increase in public spending had put the size of the British state on a trajectory that made it look more like its Gallic neighbour.

Speaking to The Telegraph, Mr Gill said: “The country that used to be the most like the United States in all of Europe was the UK. And you guys decided to go and become a lot more like continental Europe.

“Take a look at the share of government spending to GDP. You look like France, not like the US.”

UK public spending grew from 38pc of gross domestic product (GDP) in 2019 to almost 50pc at the height of the 2020 pandemic after Rishi Sunak as chancellor announced huge taxpayer subsidies to pay people’s wages during lockdown.

Spending has since come down to 44pc of GDP but remains far higher than its pre-pandemic level.

While Mr Gill did not comment on UK fiscal policy, when asked if the increase in the size of the British state was harmful for the economy, Mr Gill said: “Yes, in terms of growth.”

A surge in spending has put taxes on a path to reach a historic high in the UK, which the Chancellor, Jeremy Hunt, has admitted is bad for growth.

Mr Hunt has repeatedly said that low-tax economies are “growing the fastest” and are “more dynamic, more energetic, more entrepreneurial”.

His ambition to cut taxes is predicated on a need to get welfare spending down and increase public sector productivity. State spending in the UK has ballooned following a series of economic shocks. The furlough scheme during the pandemic cost £70bn in total.

Russia’s invasion of Ukraine also saw the UK government spend around £78bn on an energy support package that subsidised bills and gave extra support to poorer households. At the same time, public sector employment has grown from around 5.4m pre-pandemic to closer to 6m at the end of 2023.

The French state remains much larger than Britain’s, at 58pc of GDP in 2022. However, the size of the British state - 44pc of GDP - is much bigger than the US, where public spending is equivalent to 36pc of GDP.

Mr Gill said the US was better equipped to deal with shocks because of its system of less generous welfare, more local decision-making and a willingness to let badly performing companies go bust.

UK public spending accounted for around 38.5pc of GDP pre-pandemic and had broadly been closer to the US since 1989, according to data published by the International Monetary Fund (IMF).

The IMF expects the US to grow by 2.7pc this year, far higher than Britain’s growth rate of 0.5pc and France at 0.7pc.

Mr Gill said America’s dynamism was one of the reasons the US was able to bounce back from the pandemic so quickly, surpassing its pre-Covid size within a year of the first lockdown.

Mr Gill said: “When it comes to shocks, I think the US approach is always much better.”

He added that America’s willingness to “experiment” during the pandemic instead of imposing blanket lockdowns meant states were empowered to make different decisions.

“There was much more experimentation. Some countries kept their markets open, they kept the schools open. So as a result, what happened is that if you really needed a job, you went to South Dakota, right? The other thing is I think that there’s enough pressure to get back to work because the safety net is not that deep. The third thing here is you actually find that there’s a lot more births and deaths of firms.”

Mr Gill also described the closure of schools in both advanced and developing countries as the “biggest mistake” made during pandemic lockdowns.

He said low income economies that copied the subsidies handed out by governments in the West were now struggling with high debts and low growth, without any meaningful reduction in poverty.

The World Bank has warned of a “silent debt crisis” in emerging market economies where borrowing has spiralled out of control in an environment of higher interest rates.

Debt costs are throttling growth in these countries, leaving economies struggling to create enough jobs for their people.

World Bank president Ajay Banga said 1.1bn people in developing economies would reach working age over the next decade in countries that are expected to create just 325m jobs.

Mr Gill said there was also a danger of the public sector becoming too bloated in these economies as workers fight to secure stable employment.

He said: “There aren’t that many government jobs [in these countries] but [workers] queue up for them. That builds pressure on governments to actually create jobs in the public sector.

“Once they start to do that, then a whole lot of other problems start in the sense that these people are not productive in the public sector because there are too many of them. So the fiscal bills go up [but] their salaries tend to remain very low.

“What happens is that public sector payrolls tend to be at once too big for governments to bear and too small to actually give people a decent standard of living.”