Forget Europe: our only hope is to trade with emerging giants

Allister Heath
BY 2050, the largest European economies will be ranked just ninth and tenth globally; and the UK will have fallen to 11th, behind Germany and France – or so says PwC. This leads to two conclusions: first, we really need a supply-side revolution to boost long-term UK growth as there is no reason why the UK shouldn’t be much wealthier than France by then; and second, that the UK must reorient as much of its trade as possible towards the emerging economies, including Mexico, Brazil and Indonesia, all nations that will have a bigger economy than ours by then. The debate over Europe is obsolete; it is globalisation or bust for Britain.

Another intriguing fact, this time courtesy of the American Enterprise Institute. The US economy is doing better, which is good for all of us. Commercial lending by US banks during the first week of the year hit $1.526 trillion, the highest since March 2009 and just five per cent below the peak reached in October 2008. At this rate, commercial lending will be back to where it was before the recession by the end of March, analyst Mark J Perry notes. He expects the recovery in commercial lending to take 230 weeks, a full ten months quicker than the recovery from the previous bubble and bust back in 2001. America’s banking system is recovering, and doing so much more quickly than Britain’s.

We all know that there is a Scandinavian model of social policy, based on large amounts of public spending, and a UK model, where the state spends much less. Right? Wrong. Astonishingly, the UK actually now spends more on social spending (public and publically mandated) than some Scandinavian countries; even more amazingly, the UK spends significantly more on family benefits as a share of GDP than all the Germanic and Scandinavian countries.

The figures are stark: the UK spent 3.6 per cent of GDP on family benefits, according to internationally comparable OECD data analysed by the Institute of Economic Affairs. This is more than the 3.4 per cent spent by Sweden, the 3.3 per cent in Denmark, the 2.9 per cent in Iceland and Norway, the 2.8 per cent in spent in the Netherlands and of course the 1.4 per cent in Switzerland.

It is hard to understand, given all of this, why the UK gets so little bang for its buck. Not only is our welfare state expensive, it is also comparatively bad at delivering outcomes. Overall, net social spending in the UK was 22.7 per cent of GDP, more than the 20 per cent spent in the Netherlands and Norway, almost identical to Denmark’s 23.9 per cent and only a little less than Sweden’s 26 per cent.

The UK long ago ceased to be a paragon of low spending virtue. In many categories of expenditure, we have become pretty Scandinavian – and yet hardly anybody is satisfied with the outcomes delivered in return. Astonishingly, most commentators are in denial about the amount of cash already dedicated to social spending; during the riots, there was lots of baseless talk of structurally insufficient spending being an underlying cause for the problems.

The reality is very different: there are huge, crippling social problems in this country, but spending ever more money unthinkingly and often on the wrong people (such as richer pensioners) isn’t the solution, as Scandinavians realised years ago. It is high time to reform the UK’s welfare state – the coalition’s changes are merely a small first step in the right direction.
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