Britain’s Potemkin economy
The compliance industrial complex means vast swathes of the economy – from HR to ESG to EDI – are entirely dependent on the state, says Elliot Keck
If the UK was an American state we would be the poorest, according to new research from the Institute of Economic Affairs. How did we get here? Surely at the root is how dependent the economy is upon the state. And that goes well beyond just government spending, which was 45 per cent of GDP in 2024-25.
I put to you that the following examples of ostensibly private sector spending are almost entirely dependent on the state: the salaries of most people working in human resources, compliance, equality, diversity and inclusion (EDI), environmental, social and governance (ESG), tax law, “green” energy. Charities which are largely funded through government grants. Companies which rely on government contracts.
The reality is that the economy – even parts of the private sector – is heavily dependent on what has been dubbed the “compliance industrial complex.”
Government procurement spending alone is worth 15 per cent of GDP, the fourth highest in the world. Many of the biggest growth industries in recent years have been those that offer little value to shareholders, or to taxpayers, but which are forced upon companies by government diktat.
Leeches
These aren’t real, organic industries adding to the long-term growth trend. They are, to the extent that they are forced onto the economy, leeches. They are facades in the increasingly potemkin nature of the British economy. As the leader of the opposition, Kemi Badenoch, says of her time working in finance: “I woke up one day and realised 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.”
And it is becoming clear that these industries, little better than pyramid schemes in some cases, are running into difficulties as reality begins to take its toll. With state spending already at a record high outside of wartime and pandemics, there is little room for yet more expansion without further damage to economic growth. The magic money tree is withering.
We have already seen a rolling back of the EDI industry. While not as dramatic as the collapse in the US, a survey of UK businesses by the law firm Freeths found that more than half had made significant changes or abandoned altogether their EDI initiatives.
There is now evidence that ESG initiatives are also in decline. ESG is shorthand for a framework that encourages companies to focus its activities and investment strategies on social justice causes. Or as Desiree Fixler, a leading expert in this field, described it in a recent forward to a Prosperity Institute paper, the “biggest financial scam of the last two decades.”
For a brief, but economically damaging, period of time it achieved surprising prominence within British finance and in the British legal system in particular. But, unsurprisingly, it has failed to deliver the returns to investors that were promised. Take a look as a case study at Gramercy Funds Management’s investment in law firm Pogust Goodhead. Announced in 2023 to great fanfare about how the investment “materially aligns with our ESG and impact investing objectives”, the investment totalled hundreds of millions of dollars to pursue environmental litigation against various corporate giants in the UK. Three years on and City PM reported in January that 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.
If the next Prime Minister is going to unravel the regulatory state, they need to be prepared for a period of creative destruction. Britain has become addicted to an ever larger state, and it will be a long road to recovery.
Elliott Keck is a political commentator