The problem we get before going into the question is that we need an adequate benchmark to judge the economic performance be it by economic growth, productivity, macroeconomic parameters, competitiveness, social indicators of Britain. I think the most relevant comparison would be Federal Republic of Germany (West Germany) and France. By using this metric, I think it would certainly be fair to say that economic state of Britain was poor. Again, I would want to stress that this is relative because Britain being an Industrialized country offered a better quality of life than most other countries.The roots of the problem goes much deeper than merely economic policy that was adopted by the previous Government.

The most important factor was that the quality of technical management was much poorer in Britain than in other advanced European countries. One of the reasons for this was that people who would normally go into Industry in France or Germany would choose instead to enter into financial services or in public service which placed British Industry at a major disadvantage as compared to their peers. Part of the reason was that salaries for a person in middle management was almost half of France and Germany adjusted for cost of living. Britain did not stress upon the quality of technical, engineering and scientific education as did France (the Polytechnique and the Ponts et Chaussees, etc). The effect was this most noticeable in transportation. The British Government had undertaken two large public projects in 1960's but had to cancel both.

The second was the organization of trade unions with respect to their management. In Britain, there were 115 trade unions as compared to 6 major trade confederations in France and 17 major Industrial unions that were integrated into DGB in Germany. This prevented one craft in Industry to pursue it's interests as against others. Closed shops was illegal in both France and Germany as it was against the Constitution. In Germany it was illegal to go on a strike before the wage agreement had expired. This further compounded the problem in securing Industrial development in Britain. British trade unions had played a very key role in securing safer conditions for workers but they had not secured higher wages (as productivity was lower) nor shorter working hours.

Britain also made a very major mistake in it's foreign policy. After World War 2, Britain wanted to be an independent power that was separate from USSR and the United States by associating itself with the Commonwealth. This was supported as early as 1920’s by Ramsay MacDonald by stating that he supported free association between free people as the model of relationship between the colonies and Britain. The Labour Party actually tried their hardest to keep colonial powers within the British sphere of influence and declared that they felt closer to Australia, New Zealand and US rather than Continental Europe. Britain had hoped to be the chief power in Europe and organize it along a British-French axis. It was for this reason that Britain refused to join the European Single Market in 1954. However, Britain continued to lose it's influence because of Suez Canal misstep and the and consequent decolonization. When Britain had finally joined the Single Market, Europe had reconstituted along a German-French axis.

Britain had over extended and over estimated itself economically by refusing to join Italy, Belgium, Luxembourg, France, Germany, Netherlands who created the Treaty of Rome. Hence, it missed the opportunity to use it for it's advantage.The six participants of the Treaty were able to increase their trade with each other while Britain was left out and thus British Industry could not face the discipline of market forces and the high standards of quality control for Industries which would have forced it develop further particularly in high technology products. Britain's offer for a free trade deal with Canada was also turned down by Ottawa.

Ultimately, this made the crisis in 1970's much worse and contributed to the general sense of Britain's decline.

References:

Britain's decline; its causes and consequences by Nicholas Henderson

Relative Decline and British Economic Policy in the 1960s by Hugh Pemberton