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In a recent Financial Times <\/em>article<\/a>, Chris Giles asserts that the \u201cUK\u2019s low national savings rate raises fear of trouble ahead\u201d. 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<\/a> tells us:<\/p>\n\n\n\n “Today, the UK is simply a country of shoppers. Rarely has Britain been consuming so much and saving so little. As a nation \u2014 which statisticians break down into households, companies and the government \u2014 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”.<\/p><\/blockquote>\n\n\n\n To some this report may seem quite shocking, suggesting that we are \u201cliving beyond our means\u201d 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.<\/p>\n\n\n\n Knowing this, we can update Mr. Giles\u2019 numbers. Figures from the Office of National Statistics<\/a> show that the current account balance reached its lowest point in 2016, standing at minus \u00a3103 billion (5.2% of GDP) in that year. In 2017 the deficit shrunk to minus \u00a368 billion (3.3% of GDP), before moving to minus \u00a381 billion (3.9%) in 2018. The explanation of the external balance deficit is not found in the behaviour of \u201cshoppers\u201d.<\/p>\n\n\n\n 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<\/a>.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Mr Giles\u2019 profligate shoppers buy imported consumer goods because the growth of the financial sector undermined UK production. It is not true that \u201cBritain spends far more than it earns\u201d. 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.<\/p>\n\n\n\n