FOR some years there has been debate on the green left about abolishing gross domestic product (GDP) as a measure of economic performance. Many say that the growth model is ruinous and we should stop expecting rising incomes and economic expansion. However, no-one expected the Conservative Government do precisely that. Theresa May's Government has dug the magic money tree up by the roots and thrown it in a skip.

As the director of the Institute for Fiscal Studies, Paul Johnson, put it last week: “We will all have to get used to the idea that steadily rising living standards may be a thing of the increasingly distant past.” Torsten Bell, director of the Resolution Foundation, was even more bleak, and declared this “the worst decade for pay growth since the Napoleonic Wars”. Nor are these Corbynistas or supporters of the Marxism tendency. The Resolution Foundation is led by the former Tory minister Lord Willetts and the IFS is often criticised for being conservative on fiscal matters by the Labour tax adviser, Professor Richard Murphy.

We are entering what historians will perhaps call the Great Contraction – not a depression as such because there is still growth, but below the levels that have been typical since the industrial revolution. On last week's assessment by the Office for Budget Responsibility, the UK economy will lose another £42 billion by 2022 through downgraded growth – about the size of the UK education budget. Debt may not return to pre-2008 levels for another 60 years, said the IFS. There seems to have been a structural change in the UK economy since the Osborne austerity budgets of 2010 onwards.

Chancellor Philip Hammond didn't dispute any of this in his Budget speech, and seems to regard it as an act of nature. He could have announced a huge programme of investment in housing, green energy and the NHS – that is the kind of thing governments used to do when growth collapsed. But not this time. A kind of post-Brexit fatalism has entered Government thinking in this strange purgatory before the Article 50 axe falls. The Prime Minister has lost control and her ministers are out to lunch.

The underlying problem, everyone agrees, is poor productivity. British workers are about one third less productive than their counterparts in Germany or France – not because they're lazy, but because our businesses are inefficient. We increasingly have a low-wage economy in which firms choose to employ cheap labour rather than introduce new technology. Take those “hand car wash” businesses that seem to line the roads out of every Scottish town. These hardly exist in France. Car washes are invariably automated there because it's too expensive to employ people to do it by hand.

A cynic might suspect that this is a deliberate policy by the Government as it prepares Britain for a future as a low-wage colony on the edge of Europe. The free-market economists who support hard Brexit want to see a low-tax, low-regulation, Singapore-style Britain, able to dominate trade by cut-throat competition. Having docile and low-paid workers would be a good start. But this is a ruinous fantasy, even for the minority of capitalists who believe it. You don't get rich by making the country poorer.

Meanwhile, as Britain slides, the eurozone has been quietly recovering from the sovereign debt crisis – it grew by 2.5 per cent last year compared to 1.5 per cent in Britain. That may not sound much, but every percentage point is equal to a couple of hundred billion euros in additional wealth. The German economy is booming despite having no government following the failure of coalition talks last week. Business confidence in France is higher than at any time since before the financial crash.

Of course, not all growth is good, and we do need to protect the environment from rapacious consumerism. But the EU at least takes environmental regulation, and matters such as animal welfare, seriously. By leaving the EU, Britain risks going back to the dark ages of unregulated bandit capitalism, where short-term profit is the whole of the law and where workers have no security.

The UK Government marked the 75th anniversary of the Beveridge Report that created the welfare state, by continuing with a four-year benefit freeze and the Gradgrind policy of Universal Credit – a kind of digital workhouse. Yet there's a strong argument that it would make better economic sense to boost the incomes of poor families than cutting tax for higher earners or stamp duty on overpriced houses. At least the poor would spend the money on useful consumption: food, clothing, transport, which might actually benefit the economy. Even the Government's own advisers, the Office for Budget Responsibility, said that the stamp duty cut in England will largely benefit wealthy home-owners.

The story of the last 40 years has been the dismantling of Britain's welfare capitalism, which benefited everyone in the years after the Second World War. Margaret Thatcher destroyed British manufacturing in her war against the unions, and slashed taxes on the rich. New Labour stood by while wealth inequality grew alongside a ruinous debt boom. Now the Tory Governments is using withdrawal from Europe to sink the welfare state and return Britain to Edwardian times, when wealth was last as unequally distributed as it is today.

In Scotland there has been much rhetorical resistance to this Edwardian-isation. But the crunch is coming here. Last week, the non-Tory opposition parties, led by the new left-wing Labour leader, Richard Leonard, demanded that the Scottish Government use its tax-raising powers to mitigate austerity. They want three per cent increase in pay for public sector workers financed by higher taxes on people earning over £28,000. They also want the Scottish Government to reverse Universal Credit, even though Holyrood has few powers over welfare.

Nicola Sturgeon is every bit as opposed to austerity, but her last election manifesto promised no increase in income tax for those on the basic rate. And she is convinced that increasing tax on the very wealthy will lead to a reduction in tax revenues because they'll just avoid paying it. Holyrood lacks powers to tax wealth – on things like dividends, assets and savings. Nor can she increase corporate taxes, national insurance or cut pension tax relief to higher-rate taxpayers. Holyrood does not have the powers to launch an investment boom either, to grow the economy and raise revenue that way.

The trouble is that the real wealth of Scotland, and the rest of the UK, has been syphoned up to the top one per cent through mechanisms like tax havens, dividend distribution and the hyper-inflation of London property, which has concentrated vast wealth in the southeast. But the argument that Holyrood has the wrong kind of taxes is sounding increasingly threadbare. The non-Tory opposition parties say she should use whatever means she has to hand – even if this means taking from the not very well-off to give to the even less well-off.

The First Minister was correct to say that UK Government support for Scottish public spending under the Barnett formula is falling fast. But she can't ignore the fact that she has the power to bridge the fiscal gap – if she is prepared for the political consequences.