The first illustrated the growing proportion of consumption in total GDP.
Since 1998, consumption has taken up an additional six percentage points of GDP, squeezing investment, and increasing the external deficit. This surge in consumption was only possible because UK consumers and the public sector went on an unsustainable borrowing binge.The second chart is, perhaps, more shocking. It illustrates the contribution of financial services to GDP. In 2007, finance generated around a quarter of UK output.
Sentance concedes that the UK economy needs to undergo a period of "re-balancing", which is a sickly sweet word chosen to obscure a painful shakeout of financial services, a more prudent fiscal policy and a restructuring of household balance sheets. Re-balancing means a higher savings rate, smaller banks and public expenditure cuts.However, I am not sure that Sentance and his MPC colleagues are really that keen to see the UK economy re-balance. If the MPC was serious about structural transformation, it could start by raising the cost of borrowing and re-establishing an incentive to save.
4 comments:
"Incentivise saving."
I'm often told that I criticise without offering solutions too. In actuality this is untrue when one thinks about it.
Alice,
Enjoy your blog and instinctively agree with you re houseprices, debt, rebalancing economy, etc. However, what benefit do we expect from a large amount of savings as this is often stated but never explained. Is it just that we don't want lots of debt or is there a positive to an economy with a high savings rate?
Surely we want money out there doing work rather than sitting in banks?
if we stop the splurging and increase the proportion of our incomes going into pensions, investments and savings, are we not in effect supporting our financial services by giving them more ammo to play with?
after all,its the export driven economies that are hurting when we dont buy white goods and/or cars.
too simplistic?
http://www.riskwatchdog.com/2009/06/11/a-return-to-logic-a-critique-of-the-krugman-lecture-series/
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