U.K. Economy Driven by Government Spending Financed Abroad
The explanation usually given is that the U.K. economy is transforming into a service economy. True, but if you look at the numbers you see that it is to a worryingly high extent government services. Between the fourth quarter of 2004 and the fourth quarter of 2005, government consumption rose from 21.4% to 22.1% of GDP. Moreover, government investment rose from 1.7% to 2.2%. Total government purchases thus rose from 23.1% to 24.3%. This means that private sector GDP hardly rose at all last year.
Not surprisingly, this meant that both the budget deficit and the current account deficit rose last year, despite various tax increases from Gordon Brown.
Despite all the talk of "New Labour"-Tony Blair and Gordon Brown is increasingly looking like "Old Labour" with their government spending surge financed by borrowing from foreigners. This also means that U.K. economic prospects is not particularly bright. While a large inflow of Eastern European workers and a turnaround in mortgage
lending together with strong global economic growth means that total GDP growth will likely remain positive this year, the current economic policies of Blair & Brown is worsening the longer term economic prospects of Britain.