UK recovery has been weaker than in US, Germany, France and Canada

Britain has slipped behind Brazil in the global economic league table. The Bank of England has now kept the official cost of borrowing at 0.5% for three years and is part way through a third dose of electronic money creation. Living standards are on course to fall for a third year in a row, and the Institute for Fiscal Studies says that poor households and families with children will bear the brunt of government austerity over the coming year. Pressure is mounting on George Osborne to scrap the 50% income tax band, while Vince Cable expresses frustration about the government's lack of a "compelling vision" – an accurate assessment, if a cheeky one given that the business secretary is part of the team responsible for this mess.

In short, the last seven days offered little reason to be optimistic about the UK economic recovery. Only Nissan bucked the gloom by announcing it will build a new small car at its plant in Sunderland, welcome news for a manufacturing sector where output, despite a 25% depreciation of sterling, is flat-lining.

The Economist recently published its "Proust index'', a measure of how much time had been lost by the recession. In Britain the clock has been turned back to 2004, and the hands are moving forward at a painfully slow pace. Despite a monetary and fiscal boost unprecedented in peacetime, there is no recovery to speak of. The recovery here has been weaker than in the US, Germany, France and Canada, and was slower than in Japan until the tsunami of a year ago.

Explanations trotted out for this woeful performance include the likelihood that the official figures are wrong, that the UK has been hit harder than other leading industrialised countries due to the importance to the economy of the City, and that cuts to public spending have derailed the recovery. As Capital Economics has noted, however, official data is as likely to be revised down as up, Britain's financial services sector is no bigger as a share of the economy than that in the US, and most public spending cuts are still to come. None of the standard explanations, therefore, is convincing.

Even so, there is a belief that recovery will come eventually. The Bank of England assumes that if it keeps bank rate low enough for long enough while continuing to print money, demand will pick up and the economy will return to its trend rate of growth. George Osborne is working on the basis that reducing government borrowing, cutting business taxes and red tape, and liberalising planning laws will create a stronger and bigger private sector to fill the gap left by the paring back of the public sector.

The confidence of the Bank and the Treasury may well be justified, although on the basis of what has happened to the economy not just recently but over many decades it looks ill-advised.

Here's a potted history of the century that has elapsed since Britain was still – just about – the world's superpower. Initially, there was over-reliance on the old staple industries of the first Industrial Revolution and the first of many macro-economic blunders with the decision to go back on the gold standard at the pre-first world war parity. Britain was slow to develop the newer industries such as electronics and chemicals, but was starting to do so in the 1930s when the second world war broke out.

After 1945, a glorious opportunity to clean up while Germany, France, Italy and Japan were on their knees was squandered. Imperial delusions, military over-stretch, complacency, amateurism, weak management, and poor industrial relations all contributed to under-performance relative to rival western nations.

Various remedies were tried, none of which worked for long. Britain has, for decades, been a nation that has lived beyond its means, as shown by the relentless deterioration in the balance of trade and the tendency to have a higher inflation rate than countries where consumption and production have been better balanced. The oilfields of the North Sea, now running dry, cushioned the country from this reality.

Since the Bank of England abandoned direct controls on credit in the early 1970s, the economy has been prone to periodic debt binges, which have generated asset-price bubbles and, for a time, artificially boosted growth rates.

Deregulation of the City in the 1980s meant even bigger debt bubbles, and entwined borrowers and lenders in a death embrace. Meanwhile, the productive side of the economy shrivelled in the four gruesome recessions of the mid-1970s, the early 1980s, the early 1990s and the one that began in 2008 and has yet to end.

You don't need to be a genius to work out what happens next. After a while, the credit machine will crank its way back into life. The availability of cheap money will eventually generate a recovery based on consumer debt and rising house prices. Imports will rise, flows of hot money into the UK will drive up the pound and make exports less competitive. The whole, dreary cycle will repeat itself.

Osborne and Sir Mervyn King are deluding themselves if they think that a third, a fourth or even a fifth bout of quantitative easing will solve the underlying problems of the UK economy. As things stand, the choice appears to be between permanent slow growth or short booms followed by protracted hangovers.

Either way, without the financial balm of North Sea oil revenues, it will become harder and harder to maintain decent levels of public services and welfare provision.

Debate about the economy in the UK tends to be absurdly short-termist. At the moment, the focus is on whether the government's deficit-reduction plan is too rapid and whether the 50% tax rate will generate any extra revenue. These are important issues, to be sure, and there is some interesting work being done in both areas. A paper by Tatiana Kirsanova and Simon Wren-Lewis in the latest Economic Journal, for example, argues that the optimal pace of debt reduction needs to be slow to avoid adverse fiscal feedbacks on the economy. Richard Murphy produced a report for the TUC last week in which he used HMRC data to show that the 50% tax rate should raise £6bn in 2011-12.

Ultimately, though, the challenge for the UK is to find a way of weaning itself off debt. In this respect, Cable's suggestion last week that RBS should be used as a new British investment bank, with a clean balance sheet and a mandate to lend to sound businesses is the first decent idea to emerge from Whitehall in a very long time. This is precisely what needs to happen to rebuild the UK's productive base and to ensure a foothold in the growth industries of the future. It has taken far too long for the penny to drop, but better late than never.