What Will the UK Look Like: The Extremely Dismal Scenario

Image Source: Clay Bennett's "The Rescue Plan" in Chattanooga Times Free Press

The United Kingdom, also known as the sick man of Europe, has a strong reputation for all the wrong reasons: we have slow productivity growth, even slower population growth after Brexit, and an over-financialised economy - all of which are stunting the country's full potential.

All of these are not new issues, however, they have been ones which have been brewing over a long period of time. One can say that an array of the UK’s problems first manifested during the 1980s episode of stagflation. The tight monetary policy of the Thatcher years paired with poor industrial policy had sowed the seeds for the collapse of an already dwindling manufacturing sector. With this, we saw the UK economy move towards finance. London quickly became the financial capital of the world, which many saw as a new age of specialisation for the UK economy. However, a not-so-bright aspect of the UK’s new specialisation has been exposed after the 2008 financial crisis, since UK productivity growth has now lagged behind that of previous trends. Such an outcome can be attributed to three factors, namely insufficient demand (partly due to austerity), poor labour markets, and a lack of investment.

Yet, all of these may be exemplified by the over-financialisation of the British economy. During 2007, the asset-to-GDP ratio of the UK’s financial sector reached 500%, compared to 50% during the ‘70s. This financial behemoth centred primarily in London has many detrimental effects on the UK economy. The first is a within-border brain drain effect. With 1.1 million people working within the financial sector, many of these talented individuals could have worked in other fields that contribute more to UK productivity.

Second is the impact that the financial sector has on investment. Of course, the financial sector does facilitate investment by allowing for services such as the provision of loans. Does this mean that a larger financial sector would yield greater investment as loans would become more plentiful and cheaper? No, UK investment has not grown with the financial sector and is still below the pre-2008 trend. The financial sector has become too large given the size of the economy. This is getting to the point where the financial sector is becoming self-serving, and, with this, short-term behaviour rules, financial innovation occurs, and loans for real investment are pushed aside. As such, the UK’s long-term productivity prospects remain dismal.

Moving onto population and demographics, we see that the UK’s population growth has seen a decrease since Brexit. In itself, this is not the biggest of my worries. The concerns of this article lie with the UK’s ageing population and, particularly, how such a change in demographics will impact the UK’s public finances. The innovations in modern medicine mean that we can now all live longer, and (hopefully) more fulfilling lives. Many would say that such an outcome would be rather beneficial, however, I remind you that this article is written by someone studying economics - a subject with a reputation for being rather cynical.

We must be aware of the trade-offs occurring with an ageing population; the one which I choose to focus on is that of increased