New research from the Institute of Economic Affairs has starkly highlighted that if the United Kingdom were an American state, it would rank as the poorest, raising urgent questions about the nation's economic trajectory. At the heart of this alarming assessment lies a profound dependency on the state, extending far beyond mere government spending, which accounted for 45 percent of GDP in the 2024-25 fiscal year.
The Illusion of Private Sector Growth
Elliot Keck, a political commentator, argues that vast segments of the economy, ostensibly within the private sector, are almost entirely reliant on state influence. This includes salaries in human resources, compliance, equality, diversity and inclusion (EDI), environmental, social and governance (ESG) initiatives, tax law, and so-called "green" energy sectors. Additionally, charities predominantly funded by government grants and companies dependent on public contracts further illustrate this deep-seated reliance.
The phenomenon has been termed the "compliance industrial complex," with government procurement spending alone representing 15 percent of GDP, the fourth highest globally. Many of the fastest-growing industries in recent years have offered minimal value to shareholders or taxpayers, instead being imposed on businesses through governmental mandates.
Leeches on the Economy
These sectors are not genuine, organic industries contributing to long-term economic growth; rather, they function as leeches, forced upon the economy and creating a Potemkin facade that masks underlying weaknesses. Kemi Badenoch, the leader of the opposition, reflected on her experience in finance, noting, "I woke up one day and realized I wasn't working in banking or tech, I was working in compliance... There was a lot of pointless box-ticking that warped business to serve government instead of serving customers."
As reality begins to take its toll, these industries, often likened to pyramid schemes, are encountering significant difficulties. With state spending already at record highs outside of wartime and pandemics, there is limited scope for further expansion without inflicting additional damage on economic growth, signaling that the "magic money tree" is withering.
Decline of EDI and ESG Initiatives
Evidence is mounting of a rollback in the EDI industry. A survey conducted by the law firm Freeths found that over half of UK businesses have made substantial changes or entirely abandoned their EDI initiatives, mirroring a less dramatic but notable trend compared to collapses in the United States.
Similarly, ESG frameworks, which encourage companies to focus on social justice causes in their activities and investments, are showing signs of decline. Desiree Fixler, a leading expert in the field, described ESG as the "biggest financial scam of the last two decades" in a recent forward to a Prosperity Institute paper. Despite achieving surprising prominence in British finance and the legal system, ESG has failed to deliver the promised returns to investors.
A Case Study in Failure
A poignant example is Gramercy Funds Management's investment in the law firm Pogust Goodhead. Announced in 2023 with great fanfare about aligning with ESG and impact investing objectives, the investment involved hundreds of millions of dollars to pursue environmental litigation against corporate giants in the UK. However, by January, Companies House filings revealed a "material uncertainty" regarding the firm's ability to continue operating, forcing Gramercy to double its investment to over a billion dollars, highlighting the precarious nature of such ventures.
The Path to Recovery
If the next Prime Minister aims to unravel the regulatory state, they must prepare for a period of creative destruction. Britain has become addicted to an ever-expanding state, and the journey to recovery will be long and challenging. Addressing the compliance industrial complex is crucial for fostering genuine economic growth and reducing dependency on state-driven sectors.
Elliot Keck emphasizes that without significant reform, the UK risks further economic stagnation, underscoring the need for policies that prioritize organic industry development over compliance-driven facades.
