It was not so long ago that Gordon Brown claimed to have abolished ‘boom and bust’. As we enter what everyone now thinks will be a deep and prolonged recession this claim is looking – being as generous as possible – a little over optimistic.
The government is keen to stress that the current crisis was not ‘made in the UK’, and it is certainly true that this is now a global crisis that no country can insulate itself from completely.
Having said that, we have long heard claims that the UK is in a better position to weather economic and financial storms because of our stable economy and sound system of financial regulation and macroeconomic policy…
If this is true it is a bit odd that only a few weeks ago the OECD argued that the UK was, in actual fact, the worst placed among the major developed economies. Rather than being in a better position than everyone else, it seems that we are in actual fact in the worst.
Why might this be?
The most obvious reason is that the crashing financial sector is much more important to the UK economy than to most others – even the US. At least until very recently, the financial sector accounted for 10 per cent of UK GDP, and a quarter of all income tax, and had been growing in importance since the 1980s at the same time as the importance of manufacturing has steadily fallen.
This has not just happened of course – successive governments have championed the growth of the financial sector, much to the irritation of manufacturers who have long complained that economic policy has been skewed towards the needs of the financial rather than the real economy. This seemed fine during the ‘long boom’, but looks very unwise now.
The second factor is consumption. As with the financial sector, the UK has the highest level of consumption (around 90 per cent of GDP) of any other G7 economy. Again, this has been growing steadily since the 1980s at the same time as investment has become less important.
The final piece of the jigsaw is debt. UK household debt is the highest of the G7 economies at 109 per cent of GDP and has also been growing fast in recent decades.
This does not sound like a stable, well-balanced economy equipped to withstand turbulent times, but one that has become increasingly dominated by the financial sector, and which is fuelled by unsustainable consumption based on ever higher levels of debt.
When commentators talk gravely about the dire impacts of falling consumer spending they do so with good reason. The UK economy has become less stable, less diverse and more dependent on consumption and debt – which has obviously been of great benefit to the financial services sector – than any other major economy.
As we look to rebuild from the ashes of the current crisis it is vital that we do so in a way that invests for the long-term to build a diversified, sustainable economy, where finance is the servant and not the master.