Inefficient firms in the UK are failing, hit by the cost of living crisis. If productive businesses manage to take their place, they could provide a much-needed boost to growth.
The current UK government, in power since 2024, has crafted its political mission around a guiding goal: Growth.
After inheriting an economy constrained by sluggish productivity and high debt, politicians are still battling to increase national output — essential to retain competitiveness on the global stage.
The coming year represents a period of change, where politicians must manage growing economic risks, according to a new report from the Resolution Foundation.
The UK is in “a slow but consequential transition”, said authors at the think tank. “Fewer people of working age; a more fragile politics; higher taxes; and an economy that urgently needs new firms and new jobs to replace the old.”
Since the financial crisis in 2008, the UK has struggled to use its resources effectively, meaning it has fallen behind competitors in terms of productivity.
Analysis from PwC shows that in the decade following the crisis, productivity growth came to just 7%, compared to 21% in the ten years prior to the crash.
One reason for the lack of efficiency relates to so-called “zombie firms”, said the Resolution Foundation. Researchers noted that, for much of the 21st century, fresh businesses have started to replace underperforming companies at a slower rate — for reasons that can’t be fully explained.
While bankruptcies may seem like a bad thing, “creative destruction” can help the economy if more efficient businesses emerge.
“Last year there were signs of a turnaround,” said the Resolution Foundation, as "zombie firm" closures freed up a greater share of workers. This was seemingly precipitated by a period of high energy prices and interest rates, along with an increase in the minimum wage, factors that forced companies to close their doors.
“In particular, the share of jobs destroyed by firms that are closing increased to the highest level since 2011, as did the number of firms becoming insolvent,” said researchers. “The share of employment that moved between sectors has also started to increase.”
If these failures consistently make way for more efficient businesses, the UK may enjoy a much-needed boost to employment.
The nation's unemployment rate rose to a four-year high of 5.1% in the three months to October 2025, according to the Office for National Statistics, while wage growth also slowed.
Elsewhere in 2026, the Resolution Foundation underlined that government spending as a share of GDP will shrink after a major increase in the state budget during the pandemic. The reduction is partly due to lower inflation and interest rates, but also linked to reductions in departmental spending.
Rising taxes and lacklustre real wage progression will reduce the growth of average household disposable income in the coming year, researchers added. This is while an ageing population provides an increasingly pressing challenge for policymakers.
“The story of 2026 is not one of crisis, but of drift finally giving way to change,” concluded the report. “Whether that change is managed or merely endured is the question that will define the years ahead.”
