The UK economy needs rebalancing

MPC member Andrew Sentance's recent speech in Aberdeen produced two shocking charts indicating the appalling structural weakness of the UK economy.

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.