In a recent Financial Times article, Chris Giles asserts that the “UK’s low national savings rate raises fear of trouble ahead”. After reminding readers that Adam Smith characterised Britain as a nation of shopkeepers, and highlighted by a mock-up photograph of two upper-middle class women on a shopping spree, Giles tells us:
“Today, the UK is simply a country of shoppers. Rarely has Britain been consuming so much and saving so little. As a nation — which statisticians break down into households, companies and the government — Britain spends far more than it earns. On this measure, the UK borrowed 5 per cent of national income in 2015, according to the OECD, the Paris-based international organisation”.
To some this report may seem quite shocking, suggesting that we are “living beyond our means” as a country. But reporting that the UK borrowed 5% of national income merely states that the country had a deficit on its external current account of 5%. When a country has a current account deficit – a negative balance on trade plus short-term money flows – it automatically borrows and the foreign debt increases.
Knowing this, we can update Mr. Giles’ numbers. Figures from the Office of National Statistics show that the current account balance reached its lowest point in 2016, standing at minus £103 billion (5.2% of GDP) in that year. In 2017 the deficit shrunk to minus £68 billion (3.3% of GDP), before moving to minus £81 billion (3.9%) in 2018. The explanation of the external balance deficit is not found in the behaviour of “shoppers”.
The external balance has shown a deficit every year since 1984, and deteriorated especially quickly in the years following 2011. The magnitude and persistence of the deficit in the years 2013 to 2016 is unprecedented. Those two dates provide a strong clue to the causes: the long-term effects of the policies of the Thatcher government and the short-term impact of fiscal austerity. In the 1980s, the Thatcher government initiated policies that led to the long-term decline of UK manufacturing.
In addition to industry-specific policies, the deregulation and rapid growth of the City resulted in a consistently high exchange rate for decades, as explained in a recent study of the distorting effects of large financial sectors. From over 20% of GDP in the early 1980s, manufacturing value added fell to 15% in 1997 then to 9% in 2008, where it remains. In effect, financial services and short-term financial flows replaced manufacturing in the UK current account.
Mr Giles’ profligate shoppers buy imported consumer goods because the growth of the financial sector undermined UK production. It is not true that “Britain spends far more than it earns”. Correct is the statement, Britain imports far more than it exports, and covers the difference directly or indirectly with earnings from finance. It is certainly true that many if not most British households on balance spend more than their incomes, but not in the aggregate. Since early 2017 the saving rate has been almost 5% of household income, approximately the same that it was in much of the 1960s and briefly in 1999.
As PEF Council Johnna Montgomerie has argued in her book Should we abolish household debts? (Polity), household debt is a problem of income distribution, not the feckless consumption habits of the UK population as a whole. To put it simply, the rich shop till they drop and never worry about their retirement pensions. The middle class struggles to maintain its standard of living in the face of stagnant real income and declining public services. The poor spend more than their incomes to try to survive. Ending austerity will be a step in the right direction to redress these inequalities.
Photo credit: Flickr / Adam