UK's Economic Stagnation: Energy, Land, and Capital Costs Are the Real Culprits

The arithmetic of Britain's economic stagnation is hiding in plain sight. Electricity prices have jumped more than 50 per cent above international averages, pension funds have yanked £118bn out of UK equities since the Brexit vote, and the country is short 4.3 million homes compared to European peers. These aren't disconnected problems—they're symptoms of what one senior City analyst describes as a rationing system for the three ingredients economies need to function.

Simon French, head of research at Panmure Liberum, published a note this morning arguing that successive governments have effectively imposed administrative rationing on energy, land and capital through contradictory regulations and policy drift. His thesis offers an uncomfortable diagnosis that transcends the usual political battle lines: Britain has made it systematically more expensive to produce things than competitor nations, and both regulatory excess and post-Brexit capital flight deserve equal blame.

When the lights cost more to keep on

British electricity prices tracked the international average from the mid-1980s through to the mid-2010s—a three-decade stretch when energy costs weren't a competitive disadvantage. That equilibrium has collapsed. According to International Energy Agency comparisons, UK prices now sit more than 50 per cent above the average for advanced economies.

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This wouldn't sting quite so badly if generation capacity had kept pace with demand. Instead, UK electricity generation has fallen more than 25 per cent since peaking in 2006. The double squeeze—less power available at higher cost—undermines the green growth narrative that has dominated energy policy discourse for the past decade.

Energy isn't just a line item for manufacturers; it determines whether operating in Britain makes sense compared to France, Germany, or Poland.

What's interesting here is how this cost disadvantage compounds across the economy. Business groups have been sounding this alarm for years, but the structural response has been to manage scarcity rather than expand supply.

The planning system as economic bottleneck

The housing shortage has become such a familiar talking point that the numbers risk losing their capacity to shock. They shouldn't. According to research from the Centre for Cities cited in French's analysis, Britain's housing stock sits 4.3 million units below what European averages would suggest the country needs.

Half a century ago, the median house cost four times the average annual income—a multiple that made homeownership broadly accessible to working people. By 2024, that ratio had climbed to 7.7 times income. Wage growth hasn't remotely kept pace, which goes some way toward explaining why housing dominates household budgets and political anxiety in equal measure.

French describes the planning system as "perhaps the most longstanding of the UK's competitive challenges", and the evidence supports his chronology. Britain hasn't matched the current G7 average (excluding itself) for housing completions per 1,000 inhabitants in more than fifty years. The planning regime that made sense in the post-war reconstruction era has calcified into a system that treats land use as something to be controlled rather than enabled.

Grid capacity constraints have even forced developers to knock back housing developments, creating a vicious cycle where energy and planning bottlenecks reinforce each other.

The same dynamic affects infrastructure costs. Major projects in the UK routinely come in more expensive than comparable schemes in almost any other developed economy—a differential that reflects regulatory complexity, consultation requirements, and a system optimised for saying no. Grid capacity constraints have even forced developers to knock back housing developments, creating a vicious cycle where energy and planning bottlenecks reinforce each other.

The capital exodus few discuss

The cost of capital receives less attention in public debate than energy bills or housing shortages, but French argues it may represent the biggest drag on trend growth. UK-listed companies face significantly higher capital costs than peers in Europe or the United States—a structural disadvantage that makes everything from expansion plans to research spending harder to justify.

Morningstar's analysis shows approximately £118bn has flowed out of UK-focused equity funds in the nine years since the Brexit referendum. That's not hot money moving between asset classes; it represents a fundamental reassessment of British equities by investors who previously treated London as a core holding.

Perhaps more consequential is the pension fund retreat. Domestic pension funds have slashed their UK equity allocation from over 50 per cent twenty-five years ago to roughly 5 per cent today, according to figures from New Financial. The shift toward government bonds reflects regulatory pressure to derisk portfolios, but the aggregate effect is to starve British companies of patient, long-term capital.

This cost-of-capital disadvantage operates quietly but relentlessly. Companies delay hiring, cancel projects, or simply list elsewhere. The cumulative effect is an economy that grows more slowly than its fundamentals would suggest—not because of dramatic shocks, but because the baseline cost of doing business keeps rising relative to competitors.

What competence would look like

French argues for returning energy, land and capital costs to "levels that make deploying these factors internationally competitive"—a goal easier to state than to execute. His scepticism toward "sector plans and state-administered financing" reflects a view that government attempts to pick winners or direct investment typically stretch administrative capacity past breaking point whilst creating opportunities for lobbying.

The challenge facing policymakers is that fixing these three foundational costs requires confronting entrenched interests and politically difficult trade-offs. Expanding energy production means choosing between climate commitments and competitiveness. Reforming planning requires overriding local opposition. Reducing the cost of capital demands either regulatory changes that make pension trustees uncomfortable or tax incentives that shrink revenue.

Whether Rachel Reeves's Treasury or any future government can navigate these constraints will determine whether Britain's economic stagnation represents a temporary plateau or a permanent relative decline. French's analysis suggests the rationing system isn't the result of any single policy failure—it's the accumulated weight of decades of decisions that prioritised management over growth.

More articles by Ross Williams