With revised figures covering all the period covered by the data, the first table below sets out the balance of payments figures for the UK economy for the past decade, published by the Office for National Statistics (ONS) on 29th June 2018. Despite some improvement in the UK’s foreign payments outturn for 2017, largely due to the sterling devaluation following the Brexit vote, the overall position remains very unbalanced. Unfortunately, the reduced balance of payments deficit reflects sluggish growth more than improved competitiveness.
The UK’s adverse trade balance in manufactured and semi-manufactured goods widened further to £93bn in 2017 compared to £84bn in 2016, emphasising the weakness of UK manufacturing and its increasing dependence on the complex international supply chains on which much manufacturing now relies. This is highlighted by the gap between the contribution which UK manufacturing makes to GDP, at just under £200bn in 2017, and the total value of UK manufactured exports, which last year came to £275bn. This apparent discrepancy is explained by components being imported and re-exported. The car industry, for example, which as late as 1970 had almost all its bought-in components made by UK suppliers, now has barely 40% of its total output value of around £80bn generated in the UK. UK car exports are worth around £65bn a year but the value-added contributed by the car industry to UK GDP is no more than a little over £30bn.
The next table shows the latest figures for borrowing and lending between the main sectors of the economy, covering all of 2017 and the first quarter of 2018. The most striking feature is the huge change from Households as net lenders to the rest of the economy to becoming net borrowers – a swing of almost £40bn between 2016 and 2017. Corporations, however, borrowed £30bn less in 2017 than in 2016. These two changes allowed government borrowing to fall by about the same amount as the reduction in the overall balance of payments deficit.
Both these trends, however, show how vulnerable the UK economy really is. Households are currently borrowing very heavily to support living standards they are not earning while substantially decreased Corporation borrowing reflects low levels of investment. The UK economy is far too dependent on consumer demand rather than net trade and investment in new machinery and production facilities.
The table at the top of the next page provides further reasons for concern about the performance of the UK economy. Not only do we invest a far lower proportion of GDP than in most of the rest of the world. We also get a far worse return on the investment we do make. This is why our growth rate is so much below the world average.
NB the Gross Investment figure for the USA for the period 1939 to 1944 covers private investment only, so the average Social Rate of Return for the US economy as a whole must have been lower than 144%.
The Social Rate of Return is defined here as the ratio, calculated over a reasonable length of time, between the increase in GDP and the Gross Expenditure on Investment over the same period. Gross Investment as a percentage of GDP multiplied by the Social Rate of Return then equals the Growth Rate. As the table shows, the UK invests about 35% less than the world average as a percentage of GDP – 17% as against 26% - and then achieves a rate of return on this investment which – at 8% compared to 14% - is 43% less than the ratio achieved on average elsewhere. The world ratios, although much better than ours, pale into insignificance, however, compared to the performance achieved by some other countries – or our own performance from the mid-1930s to the early part of World War II.
Why is there such an enormous difference in the returns achieved? There is a simple explanation, Most public sector investment, in roads, rail, schools, hospitals, public buildings and housing, however desirable it may be in social terms, produces low overall rates of return, which are generally little more than the rate of interest on the finance needed to pay for it. It therefore makes little contribution to economic growth. The same is true of much private sector investment – in office blocks, shopping malls, new restaurants housing or even in IT to support legal, financial and advertising services. There are, however, some other types of investment – clustered round mechanization, technology and power – on which far higher total returns can be achieved. These tend to be found in the private sector, especially in light industry. As the next table shows, however, because we have de-industrialized to the extent we have, levels of investment in these sectors of our economy are pitifully low – and by the time depreciation is deducted, there is nothing left. This is why we have such a massive productivity problem.
The extreme case of de-industrialisation from which the UK suffers is a major drawback for us for four interlocking reasons. Productivity increases are much easier to achieve in manufacturing than in services, so the smaller the proportion of GDP derived from manufacturing, the lower the growth rate is likely to be. More than half our exports are still goods rather than services and we will never overcome our huge balance of payments problem if we do not have enough manufactures to sell overseas. Productivity is much higher in manufacturing than in services, reflected in average wages being nearly 20% greater in manufacturing than they are in services. Much of the huge imbalance there is in the UK between London and the regions comes from the collapse of manufacturing – down as a percentage of GDP from 32% in 1970 to less than 10% now - which has left many parts of the country with far too little to sell to enable them to pay their way in the world.
The bald truth is that until we both step up the proportion of our GDP which we spend on investment and we concentrate far more of it in the most productive opportunities for increasing output, we will never get our growth rate up to a level which will enable us to start raising average living standards again.