The UK’s capacity to innovate matters far more than panic over consumer spending

The UK’s capacity to innovate matters far more than panic over consumer spending

The debate about Brexit has become mired in a virtually incomprehensible quagmire of detailed and technical negotiations between the UK and the rest of the EU.

Yet the campaign itself in 2016 was dominated by broader questions of political economy.

In addition to the hurly burly of claims about extra NHS spending or Project Fear, both sides took a serious, longer-term view of what was needed to sustain Britain’s prosperity. All this has been lost sight of, but the fundamental issue has not gone away. So does Britain have an economy which is fit for purpose in the twenty-first century?

At one level, the evidence seems to side with the Remain camp. Growth in the UK since the depth of the recession in 2009 has been decidedly unbalanced compared to much of the rest of the EU.

We can break down the growth of the total economy – GDP – into categories defined by who is doing the spending: how much is done by individuals as consumers, how much by firms in terms of capital investment, and how much by the public sector. We also have the net balance between our exports and imports.

Looked at this way, Britain’s growth since 2009 has been concentrated in a seemingly unhealthy fashion on consumer spending. This accounts for no less than 58 per cent of the total growth in the economy 2009-18. Investment by companies takes up another 29 per cent, and there has been a slight deterioration, amounting to just three per cent of GDP, in our net exports.

This is in sharp contrast to Germany. The increase in investment is similar, making up 27 per cent of the total increase in GDP. But consumption is just 32 per cent, and net exports have boomed, accounting for 22 per cent of the increase in German GDP. No wonder President Trump has concerns about German trade surpluses.

This pattern is similar in countries closely connected to Germany. Compared to the UK, increases in consumer spending are only a relatively small part of the total expansion of the economy since 2009 in Austria, Belgium, Denmark, France, the Netherlands, and Sweden.

Surely an economy which relies less on spending by individuals is better placed than one in which they splurge every last penny?

Well, up to a point. For one thing, public spending accounts for a larger proportion of total growth in the Greater Germany group than it does in the UK. The rise in public spending in Britain makes up just eight per cent of total growth. In France, it is 25 per cent.

But the key evidence comes from the US. Here, spending by individuals makes up no less than 75 per cent of the total expansion of the economy since 2009. Yet America remains the most dynamic and innovative economy in the world.

Economic theory has long identified the capacity to innovate as being the key determinant of long-term growth, not who spends what. The debate over post-Brexit Britain should be about how to boost innovation, and whether the European Commission is a help or a hindrance to this.

Paul Ormerod 

As published in City AM Wednesday 25th July 2018

Image: Regent Street & Oxford Street by Tony Webster is licensed under CC-BY-2.0

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