Brexit and the UK economy

Therefore, the UK’s economic strength vis-à-vis the EU and the country’s fitness to go it alone is a much-debated topic from the public houses of Darlington to the green leather benches of the House of Commons and most places inbetween. 

While the debate is heated and emotions get hot, facts are often noticeable by their absence. Everyone has their opinion on the state of the UK’s economy, its trade with Europe, the burdens placed upon its welfare state, its rising (or falling) international competitiveness and so on. 

Yet almost no one has the facts needed for an intelligent discussion; except – of course – those convenient facts that offer lazy confirmatory bias of whatever needs to be defended. 

This is where the following 16 charts and eight tables come in useful. They are intended to be a fact-packed and opinion-free health check on the UK’s economy, offering some of those facts that put perspective into the most heated argument. 

Digest what’s on offer on the following pages and you will have a better grasp of where the UK’s economy has come from, where it is now and – by implication – how well equipped it is to stand its challenges. 

We are always told that a nation’s greatest asset is its people, so let’s start with a look at the UK’s population. It is rising, albeit extremely slowly. Over the whole period covered by the chart above, the annual growth rate is 0.4 per cent a year. Since 1990, following the collapse of the Berlin Wall, which marked the start of the period associated with the twin forces of mass migration and globalisation, the growth rate is still only 0.5 per cent a year. And since 2007, which roughly coincides with large-scale migration into the UK from the former Soviet republics of eastern Europe, the growth rate has accelerated to just 0.7 per cent a year.

However, at least according to the data of the Office for National Statistics (ONS), the UK’s working-age population has not kept pace with that growth. In the 10 years 2007-17, it has risen by just 0.4 per cent a year to 42.1m. Of the population that is outside the range of those of working age or close to it – aged 15 to 64 – the proportion of those aged over 65 has risen sharply compared with those under 15. This is the so-called ‘greying’ of the population, which is a clear feature throughout the developed world and beyond. 

Those aged over 65 are now equivalent to 29 per cent of the UK’s working age population compared with 18 per cent in 1960. True, the proportion did dip a little in the early 2000s as the UK’s working-age population was swollen by migration. But now the proportion is rising again and, according to projections from the ONS, will be 37 per cent by 2041. We will discuss some implications of this in other charts and tables. 

There is always someone worse off than you. In terms of the greying of the population, then – relatively speaking – the UK is actually quite well off. Its old-age dependency ratio has risen steadily since 1960 but is topped by most leading developed nations, three of which – Germany, France and Japan – are shown in chart 2. 

Japan, having exhausted the demographic dividend of a young population in the 1960s and 1970s, now has a demographic burden that is depressing growth and will exert further pressure. Germany – although the chart does not show it – faces a problem almost as deep. Its median age – where an equal number of people are both older and younger – is 47.1, just fractionally less than Japan’s 47.3. By contrast, the UK looks almost sprightly, with a median age of 40.5. That’s younger than France’s 41.4, but is quite a lot older than the US’s 38.1. 

The UK’s economy just keeps on growing and growing. The shaded area in the bottom half of chart 3 below shows the relentless growth in output since 1960 and – just to spell it out – uses data expressed in today’s money values, so it shows ‘real’ changes. 

In 2017, output – as measured by gross domestic product – is estimated to have topped £2 trillion for the first time. That compares with output of £523bn in 1960, for a compound growth rate of 2.4 per cent a year. 

Yet the chart also shows an economy whose pace of growth is getting slower and slower. That is illustrated by the lines on the chart. These show the rolling five-year average growth rate both for the economy as a whole and for per-capita output, which is always likely to rise slower than the whole economy because the population is also rising. Since the mid 1980s, each successive peak and trough in growth has been lower than the one before. And that dismal trend looks set to continue. The current five-year rate – 2.2 per cent – is comfortably lower than the previous peak of 3.4 per cent in 2001, but is about to turn down. And that’s before the ratcheting effect caused by the flipping of the global growth rate and – possibly worse – any idiosyncratic effects from Brexit kick in. 

Let’s be clear, in the race for global growth in output the UK has not been a laggard these past 30 years. True, chart 4 (see over the page), which compares growth between five ‘contenders’, has an arbitrary start date. But whichever start date was chosen from the 28 years covered, the result would have been much the same – global output would have steamed ahead, followed by the US then the UK with the EU and Germany trailing behind. 

In a way, global growth proxies for China’s growth. That’s because China has grown so fast in the past 30 years that it is off the scale; alternatively, its inclusion in the chart would have rendered the progress of the other countries basically as one straight line. To put it into numbers, starting with all the others at 100 in 1990 by 2017 China would be 1,225, compared with 171 for the UK and 191 for the US. 

Table 1: Shares of global output (%)
	UK	USA	Germany	European Union	China
1990	3.3	19.6	5.3	25.2	3.7
1995	3.2	19.9	5.2	24.3	5.9
2000	3.1	20.5	4.8	23.4	7.4
2005	2.9	19.3	4.1	21.5	9.8
2010	2.5	16.7	3.6	18.8	13.9
2015	2.3	15.7	3.3	16.8	17.1
2016	2.3	15.4	3.3	16.6	17.7
2017	2.3	15.2	3.2	16.4	18.2
Percentage of global total (purchasing power parity) Source: World Bank

One caveat is worth noting, however – these data from the World Bank are based on output at so-called ‘purchasing-power parity’ (PPP). This is a way of adjusting for differences in the cost of living from country to country. In China, which remains fairly poor compared with the rich world, a dollar’s-worth of output goes further – buys more goods and services – than in the UK. So, using PPP dollars, China is already the world’s biggest economy. However, simply using unadjusted dollars it still trails far behind the US. 

Table 1 shows another way of putting the UK’s output into context. A global share of 2.3 per cent might sound puny, but let’s remember that there are about 200 nations in the world, which makes for an equal unweighted share of about 0.5 per cent each. Besides, a 2.3 per cent share puts the UK in the top 10 and let’s reiterate that these data are based on purchasing-power parity, which penalises the UK with its high living costs. 

In effect, the fall in the developed world’s share is matched by China’s rise. In the 27 years covered, China’s chunk of output has risen by 14.5 percentage points compared with a loss of 13.2 points for the EU and the US combined. That just leaves a percentage point or so to be grappled between fast-growing countries, mostly in south Asia, and shrinking economies – relatively speaking – in South America and Africa. 

Chart 5 tells us what everyone knows – that the UK consistently runs a balance-of-payments deficit where a huge surplus on selling services (mostly financial) to the world is offset by an even bigger deficit in buying goods from abroad. In addition, what has changed in the past 40 years is that the UK has gone from generating a big surplus on investments to sustaining a much bigger deficit. This is not necessarily bad. In the 1960s and 1970s, chiefly as a residual effect of its empire, the UK still had much capital invested abroad from which it received interest and dividend income. Now that position has been reversed. Much of the overseas capital has been repatriated or lost. Meanwhile, the UK has become a home for overseas investors’ capital; particularly for those seeking access to the EU via the UK. So the UK gets the capital investment – which produces jobs, spending and taxes – but the price is the cost of interest and dividends flowing outwards. 

Perhaps more concerning is that the size of the UK’s deficit has grown in relation to the size of its economy, as the black line on chart 5 shows. True, on one interpretation that’s just the obverse of some nations, such as Germany, running big trading surpluses (their unspent income has to go somewhere). However, the potential problem (dealt with more fully in Chart 10) is that increasingly the UK depends on overseas lenders to make good the shortfall. 

Chart 6 takes current account balances in some major trading categories and shows them in relation to GDP in the past 20 years. It’s not all-inclusive, which means that the differences in the balance between surplus and deficit categories do not net out to the overall trade deficit in relation to GDP, which – for what it’s worth – was 3.9 per cent in 2017. 

The chief trend the chart illustrates is the growing power of the UK’s financial services, where the surplus rises from 1.3 per cent of GDP in 1998 to peak at 3.5 per cent in 2011-13. The ‘other services’ category – the likes of law, marketing and media – also shows impressive gains from 0.9 per cent of GDP to 1.7 per cent. Markedly going the other way is the trend in ‘power’ (oil, gas and electricity), which swings 1.2 percentage points from a small surplus to a 1.0 per cent deficit as North Sea output and exports dry up.

All other categories save one show a greater propensity to import. The exception is travel, where the deficit has shrunk appreciably since 2008. This could reflect declining affluence since tourism is the major component of this category. Brits holidaying abroad count as an import (the cash leaves the country), while foreigners coming to do the Tower, Stratford and not much else count as an export. 

Table 2 focuses the beam on just a single year’s trading – 2017 – showing credits (ie, exports), debits (imports) and the balance. Given what Chart 6 told us, it is fairly predictable – a substantial deficit on almost every category of goods that is just too big to be offset by income generated from supplying services. 

Table 2: The UK's balance of payments in 2017
£m	Credits	Debits	Balance
Goods
Food, beverages and tobacco	22,837	47,007	-24,170
Basic materials	7,955	11,847	-3,892
Oil, coal, gas & electricity	29,913	45,474	-15,561
Semi-manufactured goods	89,839	112,449	-22,610
Motor cars	34,150	34,255	-105
Other consumer goods	31,578	61,737	-30,159
Capital goods	62,622	83,388	-20,766
Other goods	59,977	80,162	-20,185
Total goods	338,871	476,319	-137,448
Services
Financial, insurance & pensions services	77,953	17,083	60,870
Other business	86,846	46,622	40,224
Telecoms, IT & intellectual property	36,386	20,873	15,513
Manufacturing, maintenance & construction	5,992	3,343	2,649
Travel, tourism & transport	69,862	77,556	-7,694
Total services	277,039	165,477	111,562
Income
Investment income	169,410	200,386	-30,976
Other income	23,036	45,133	-22,097
Total income	192,446	245,519	-53,073
Total current account	808,356	887,315	-78,959
Source: Office for National Statistics

The most interesting line in the table – perhaps because it is the least expected – is the UK’s near break-even in trading motor cars. An industry that seemed to epitomise the UK’s industrial decline in the 1970s and 1980s now looks in decent health – thanks largely to inward investment – where exports pretty well equal imports. 

Still, let’s not get carried away. To put the UK’s figure into some context, the £34bn or so the UK generated from exporting motor cars compares with almost £200bn made by Germany, although admittedly that also includes exports of commercial vehicles. 

Chart 7 does for the UK’s trade deficit with other countries what Chart 6 did for categories of goods and services. However, this one includes all trading with other countries so that, for example, the bar for 2017 showing about £48bn of trading surplus and £128bn of deficits nets out – more or less – to the correct figure for the UK’s overall current-account deficit. 

Perhaps more important, it introduces us to the notion of the UK’s dependence on the rest of the EU for its trade; a topic that will be developed – and discussed – in Chart 8 and Tables 5 and 6. In simple terms, the UK runs a trade deficit with the EU and China and a surplus with the rest of the world, most of which is with the US. 

The chief features of Chart 7’s overview are an enduring surplus in trade with the US, which is by far the UK’s biggest trading partner (see Tables 3 and 4 over the page), a growing deficit with China that began small (£2.5bn in 1999) and ends large (£21bn in 2017), and a deficit with the EU including Germany that begins huge at £16.6bn and ends absolutely enormous at £96bn. 

To put these changes into context, the deficit with China grew 8.6 times over the 18-year period compared with a multiplier of 5.9 times for the deficit with the EU bar Germany and one of 5.4 times for Germany alone. Meanwhile, the surplus with the US rose 2.2 times and, for the rest of the world, there was a £30bn swing from a deficit to a £20bn surplus. 

Table 3: How the UK's exports are distributed
Current account credits, 2017
Region/country	Amount (£bn)	% global total	% EU total
European Union	344.3	43
of which:
Germany	67.7	8	20
France	51.1	6	15
Netherlands	52.2	6	15
Europe (inc EU)	416.2	51
The Americas	197.7	24
of which, USA	159.4	20
Asia	149.6	19
of which, China	25.3	3
Rest of the world	44.9	6
Global total	808.4
Goods & services only. Source: Office for National Statistics

Table 4: How the UK's imports are distributed
Current account debits, 2017
Region/country	Amount (£bn)	% global total	% EU total
European Union	440.5	50
of which:
Germany	91.5	10	21
France	52.3	6	12
Netherlands	56.3	6	13
Europe (inc EU)	523.4	59
The Americas	163.4	18
of which, USA	131.2	15
Asia	165.5	19
of which, China	46.5	5
Rest of the world	36.0	4
Global total	887.3
Goods & services only. Source: Office for National Statistics

The tables above take Chart 7 and develop it in tabular form for 2017 alone. Noteworthy figures are that the EU accounted for 43 per cent of the UK’s exports and 50 per cent of its imports. However, to the extent that much of the UK’s trade with the rest of Europe is with Switzerland and Norway, which are both in the EU’s single market, then closer to 50 per cent of UK exports and 60 per cent of imports come from single-market countries (but see Table 6 for further discussion). Meanwhile – and as noted earlier – the US, despite its distance, is by far the UK’s biggest trading partner, accounting for 20 per cent of its exports and 15 per cent of imports in 2017. But China – the world’s second biggest economy – only accounted for 3 per cent of exports and, despite all those ‘Made in China’ labels, accounted for just 5 per cent of imports. And the rest of the world, which actually accounts for a pretty big chunk of the globe – Australasia, sub-Saharan Africa and more – isn’t that important (6 per cent of exports and 4 per cent of imports). 

Chart 8 puts the UK’s reliance on trading with the EU in a long-run context. The good news – just about – may be that this reliance has slightly diminished over the past 20 years. In 1999, the UK’s exports to the EU (in its 28-country form) were 55 per cent of its total, but that had drifted down to 44 per cent in 2017. Imports also fell as a proportion, but not so far – from 56 per cent to 53 per cent. That meant the trade gap with the EU widened as the UK recovered from the 2008-09 global financial crisis faster than the eurozone, as the grey bars on the chart show. 

Table 5: The UK's trade with the European Union 2017
	Exports		Imports		Overall
£m	Goods	Services	Goods	Services	Balance
European Union
Germany	37,135	19,683	68,722	9,387	-21,291
Spain	10,367	5,748	16,436	14,866	-15,187
The rest (ex Irish Republic)	20,567	22,535	36,863	20,175	-13,936
Belgium	14,060	4,685	25,478	2,733	-9,466
Netherlands	22,043	17,003	40,680	6,251	-7,885
Poland	4,991	1,880	10,457	2,342	-5,928
Italy	10,365	8,504	18,562	5,448	-5,141
France	24,248	16,130	27,455	13,359	-436
Irish Republic	20,309	13,725	14,488	7,300	12,246
Total EU	164,085	109,893	259,141	81,861	-67,024
Rest of the world	174,786	167,146	217,178	83,616	41,138
World Total	338,871	277,039	476,319	165,477	-25,886
Source: Office for National Statistics; note - the data exclude financial income

Focusing on the UK’s most recent full-year’s trading with the EU in Table 5, the key figures to note are:

• The oddly high amount of trade in goods done with Belgium and the Netherlands, which we discuss in Table 6, dealing with the ‘Rotterdam effect’.
• The substantial deficit with Spain, which is driven by the £9bn deficit in services, much of which relates to UK holidaymakers.
• The £12bn surplus with the Irish Republic. That’s the UK’s second biggest surplus after the US. It is spread evenly between goods and services, although the former could be affected by whatever permanently replaces the so-called ‘backstop agreement’ part of the UK’s proposed exit settlement with the EU. 

 

Table 6: Seeking the Rotterdam effect
	Imports from UK		Exports to UK		Overall
Trade with UK as % GDP	Goods	Services	Goods	Services	Balance
Belgium	3.9	1.3	7.0	0.7	-2.6
Netherlands	3.6	2.8	6.6	1.0	-1.3
Germany	1.4	0.7	2.5	0.3	-0.8
France	1.3	0.8	1.4	0.7	0.0
EU average	1.5	1.0	2.4	0.8	-0.6
Source: ONS, World Bank

Table 7: Where global output grew
	2000		2010		2017
Country	% of global growth on year	% of UK's exports	% of global growth on year	% of UK's exports	% of global growth on year	% of UK's exports
China	11	1	17	2	22	4
United States	59	18	9	16	16	18
Germany	-24	11	0	9	4	9
Japan	31	3	8	2	-2	2
India	1	1	6	2	7	1
Latin America & Caribbean	20	2	18	3	13	2
Sub-Saharan Africa	2	2	6	3	3	2
European Union (ex Germany)	-40	43	-2	40	12	35
All other countries	40	19	38	23	25	27
Source: World Bank

If the UK is to turn itself into a mega Singapore anchored off the west coast of Europe, then it must trade where the growth is. At least, that’s what the optimistic voices backing Brexit say. Table 7 attempts to set some facts against that wish. It shows where global growth has come from since 2000 – by important countries and remaining regions – and, against that data, juxtaposes the share of the UK’s exports. In other words, it asks: does the UK have a growing presence where the growth is?

Sort of. Predictably, the biggest source of growth is China, which accounted for 22 per cent of the global total – $1,046bn – in 2017. The good news is that the UK’s exports to China have quadrupled as a share of its total since 2000. The bad news is that this is still just 4 per cent of the total. The US ranks second as a source of growth – $766bn or 16 per cent of the total in 2017 – and takes 18 per cent of the UK’s exports. Despite Donald Trump’s mercantilist views, that’s probably good for the UK. 

It is also encouraging that the UK’s share of exports destined for ‘all other countries’ is rising nicely. That’s because this category, which includes much of Southeast Asia, has been growing fast, too, regularly contributing over 20 per cent of global growth. 

Elsewhere, the UK is under-represented in Latin America – just a 2 per cent share of exports to a region that, even in a funk, contributed 13 per cent of global growth in 2017. And then there is the EU – big, not growing much and taking the lion’s share of UK exports; not a happy combination.

Perhaps more than anything – and unwittingly – Chart 9 below helps explain the global financial crisis of 2008-09. First, let’s look at what the data say. They tell us – as if we didn’t know – that the UK consistently runs a deficit on its current account. In only 12 of the 58 years contained in the chart has it produced a surplus and never since 1983 when North Sea oil was pumping at its maximum rate. Not just that, the deficit is rising in relation to national output. Only once before 2008 and the financial crisis did it exceed 4 per cent of GDP. In the 10 years since then, it has done so seven times. 

Over the same period, the US has gone from being a small net lender to the world to being a substantial borrower. Germany and China have moved in the opposite direction. True, in the 1990s Germany went into deficit for a few years as it wrestled with the challenge of unification. Now it runs the world’s biggest trading surplus. China’s surplus became enormous, too, but has shrunk substantially since the financial crisis through a combination of limited demand from overseas and the effect of stimulation on domestic demand. 

But the chart’s main message is that borrowers and lenders – nations in deficit and in surplus – have diverged. In the early years of Chart 9 the lines are squiggled together so tightly as to be unclear. This tells us that none of the four nations borrowed much in relation to their output, which is a loose guide to borrowing capacity. But since the late 1990s – as the lines diverge – it is obvious which two of the four are lenders (nations in trading surplus) and which are borrowers (nations in deficit). This matters. Borrowing and lending will always net out to zero, but when it does so from positions that are far removed from each other the danger of distortion or dislocation when the unexpected happens is greater. The likes of Greece and Iceland know that only too well. And it’s an issue for the UK that is taken up in Chart 10. 

Mark Carney, the governor of the Bank of England, not so long ago borrowed a line from the American playwright Tennessee Williams, and spoke of the UK’s reliance on “the kindness of strangers”. Chart 10 illustrates what he meant and how – approaching Brexit – it is a concern. 

It compresses the economy into four groups of possible lenders and borrowers. The first three are UK-based: the government, households and companies. Then, partly as a balancing item – because borrowing and lending must always net out to zero – there is the overseas sector, the people, companies and governments that buy UK government debt and fund any shortfall on the country’s current and capital accounts. 

As might be expected, the government and companies are consistently net borrowers; although, in the case of companies, perhaps less than expected since the financial crisis. Meanwhile, households will tend to save more than they spend as they put by for retirement and rainy days. Their propensity to save may lessen in boom times – eg, the mid 2000s. But what’s odd – and maybe worrying – is that households have become net borrowers these past two years. So a familiar source of funding has – at least temporarily – dried up. 

This might prompt images of struggling households going into debt to make ends meet. Maybe. What’s clearer is that since 2016 the UK has relied totally on overseas lenders to plug its funding gap. If that persists, it makes the UK more than ever dependent on those strangers who may yet demand a higher price for their continuing kindness – ie, higher interest rates. 

Focusing on the domestic economy, the UK’s workers just keep on getting more productive. As Chart 11’s grey bars show, the rise in productivity – output per hour worked – is inexorable. Well, almost. The chart also shows that the pace of improvement has slowed markedly since 2008-09’s global financial crisis and that’s best illustrated by the chart’s yellow line, which shows productivity’s five-year rolling average growth rate. With hindsight, it is clear that the trend has been averaging down since the mid 1990s – each succeeding peak failing to top the previous one, each succeeding trough forming a new low. Granted, that could change. It is still too early to tell. Year on year, productivity hasn’t failed to grow since 2012, but nor has it topped 1.0 per cent a year since 2011. 

In an international comparison of the productivity of developed economies, the UK is performing below par without being dreadful (see Chart 12). From the start date of 1990, productivity improvements at all four banded closely together until the early 2000s when Germany dropped out of the pack. The UK was next to fade, after the 2008-09 financial crisis. True, that start date was arbitrary. But if the start date had been 2000 or 2005 the respective rankings would have been the same with the UK third out of four and Germany – perhaps because of its rapidly-deteriorating demographic make up – bringing up the rear. 

While productivity has continued on its inexorable upwards trend (see Chart 11), wages have stagnated. Small wonder, perhaps, that companies – and share prices – have done so well. Granted, this is a gross simplification. Even so, it is interesting to note in Chart 13 the contrast between the real cost of UK labour (measured by inflation-adjusted unit wage costs in the red line) and output per hour (the blue line). The implication is that a factor of production other than workers has extracted the gap between labour costs and output and that party – judging by the corporate return on capital – would seem to be the owners of capital. 

True, return on capital marched downwards from the late 1980s until the turn of the millennium, but that was more to do with the evaporation of the inflationary component of capital’s returns as inflation-busting became a reality. Since the global financial crisis, return on capital has tiptoed upwards as unit labour costs encountered their most sustained fall. 

However, the final piece of data in the chart threatens to put the kibosh on this piece of Marxist reasoning – inflation-adjusted median (ie, mid point) disposable household income has kept pace with output since 1988. Of course, that’s not really consistent with stagnant wage costs, although it is helped by interest rates – and therefore borrowing costs – falling far and long. Nor is it consistent with a bolshie electorate that would vote for Brexit. But there it is. One to ponder. 

The health of a country’s economy may be judged by the ability of its government to sustain public spending. Sure, that’s stated as contention rather than fact because – like it or not – the calls made on the public purse don’t diminish. So, like many developed economies, the demand for public spending in the UK will continue to test the nation’s ability to meet it. 

Chart 14’s dark blue area shows the growth in nominal levels of government spending, from £64bn a year in 1976 to 2017’s £790bn. Even in real terms, the increase has been remorseless, growing at 1.9 per cent a year. Happily that’s a little less than the pace at which the economy has grown, which is why public spending as a percentage of GDP (the chart’s red line) is lower now than it was in 1976. As the demands of a welfare state dictate, this proportion moves inversely to economic growth – thus the huge surge in spending-to-GDP in 2008-10. 

Whether spending relative to GDP dips as far as the previous trough – 34.1 per cent in 1999 – is likely to depend both on the timing of the next global slowdown, which might arrive sooner rather than later, and the severity of Brexit. Meanwhile, an ageing population and, consequently, a burgeoning welfare budget don’t augur well. 

Given the demands of an ageing population (see Chart 1), what’s perhaps remarkable is that the government is still managing to limit its spending on what it labels ‘social protection’ – what Chart 15 below labels as ‘pensions and welfare’ – to about a third of the total. 

First, let’s put amounts to some of the proportions shown in the chart. In 2017-18, government spending totalled £790bn, of which ‘pensions and welfare’ was by far the biggest chunk, accounting for £268bn. The other big and identified categories were health (£164bn), education (£88bn), defence (£39bn – which includes spending on pensions) and interest on government debt (£45bn). The light grey bar at the top of each column is for all other spending. This includes a potpourri dominated by ‘economic affairs’ (£53bn) in which the lion’s share is for transport (£31bn). Other categories within this bar are housing (£12bn), and agriculture and payments to the EU (£5bn each). 

Chart 15’s chief feature is surely the remarkable stability of each category in the total, although the availability of a longer time series may have been enlightening. That said, the chart does show pressure on spending on education where the proportion has shrunk from 5.7 per cent to 2017-18’s 4.3 per cent in just seven years. Meanwhile, spending on health has risen from 4.6 per cent of the total to 7.1 per cent over the period of the chart. 

Table 8: Government spending on 'social protection'
£m	2013-14	2014-15	2015-16	2016-17	% total
Sickness and disability	46.9	50.2	53.3	53.3	20
State pensions	104.2	108.0	110.1	111.3	42
Families and children	24.6	25.3	25.3	24.4	9
Unemployment benefits	4.9	3.5	2.7	2.2	1
Housing	26.4	26.4	26.2	25.4	10
Income support & tax credits	31.9	32.1	32.1	32.2	12
Other spending	15.0	15.5	15.3	15.5	6
Total	254.0	260.9	265.0	264.3	100
Source: PESA

Now let’s turn to Table 8 for a spotlight on pensions and welfare spending. Clearly, if we had the data, government spending on state pensions would be a category in its own right in Chart 15. Its budget of £111bn in 2016-17 exceeded education (£85bn) and would be exceeded only by health spending (£143bn) among the chart’s individual categories. 

Other points to the note in the table are (1) spending on unemployment benefit – the instinctive target for armchair critics of welfare spending – is now minimal and (2) spending on sickness and disability benefits – in part an alternative to unemployment benefit – continues to grow faster than average. 

If this series of charts and tables has tended towards a pessimistic message about the state of the UK economy, let’s finish on a happier note by focusing on the almost remorseless rise in the wealth of the nation’s households and at least the slowdown in the increasingly unequal distribution of income. 

Clearly, the nation is not on the breadline. Deflating wealth by changes in the consumer price index (CPI), the government’s chief measure of inflation, since 1995, then Chart 16 shows that wealth contained in housing more than tripled from £1.7 trillion to £5.8 trillion over the 22-year period. Simultaneously, financial wealth doubled from £2.4 trillion to £4.8 trillion. 

True, the global financial crisis took a toll, especially on housing wealth, which only returned to 2007’s level in 2016. Thanks to the determination of central bankers to see their pals in the financial markets do alright – that’s tongue in cheek – then the effects of quantitative easing meant that financial wealth barely took a blip and was back past 2007’s level by 2011. 

Meanwhile – and surprising – income was less unevenly distributed by the end of the period than at the beginning. That was the case based on both wealth-distribution measures shown. First – and better known – is the Gini ratio, which attempts to show the proportion of income taken by the wealthy; second, is the Palma ratio, which shows the ratio of income grabbed by the wealthiest 10 per cent to that taken by the poorest 40 per cent. Starting in 1995, we have indexed both measures to show their changes since then. 

Scepticism may be called for. Gini and Palma ratio supplied by the Office for National Statistics date back to 1977. Construct indices for them from that starting date and income distribution remains much more skewed towards the wealthy even if it is well below the peak levels of inequality in 2001-02. 

Besides, the Palma ratio may have become an especially-suspect indicator. It rests on the idea – long held good – that the income share taken by the middle classes changes little, so fluctuations focus on changes between the very richest and the poorest. That notion may no longer apply. At least, it contradicts the anecdotal evidence of recent years that it is middle-income families – especially those towards the poorer end of that particular distribution – who have become the most squeezed.