A dynamic model of financial balances for the United Kingdom

[Attention conservation notice: Rampant self-promotion]

Irish economy readers might be interested in this work. Together with colleagues at the Bank of England we’ve built a model of financial balances for the United Kingdom. The basic question we’re trying to answer is: how can large open economies deal with persistent imbalances now and into the future? This is the first model of its kind for the UK and something we hope to build on in the future. We summarise the findings in this Bank Underground blog.

 

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

11 thoughts on “A dynamic model of financial balances for the United Kingdom”

      1. If we had had such a model in the 2000-2007 period the reliance on foreign borrowing to finance speculative stocks of land and buildings way beyond normal turnover, and thus the coming crash, would have been more starkly evident, perhaps even to the point where someone would have taken corrective action (??).

  1. They can’t. Osborne couldn’t get the deficit to zero cos the payrises modelled didnt happen. Ceteris is not Paribus. The UK now wants to say #### off to its major export market while running a 6% deficit with no payrises and health plus Soc security at 45% Gov spending and growing. It is beyond Monty Python. The deficit means the Euros will slaughter it in negotiations.

  2. The UK like Ireland has a geographically unbalanced economy with the capital region having a big impact on the economy. The UK like Ireland also has a big foreign sector and before the Brexit vote Mark Carney, BoE governor, echoed Tennessee Williams when he said that the funding of the UK’s persistent current account deficit is dependent on the “kindness of strangers.”

    The UK last had a current account surplus in 1984 and a trade surplus in 1997.

    Again as in Ireland development land is made artificially scare — real prices have risen 15 fold since 1955, three times the rise in house prices.

    The Economist says that about 25,000 homes were built in London in 2015, half of what was needed. Over one-fifth of London’s land is “green belt”— this is mainly not places where posh people walk their dogs and let them crap wherever without taking responsibility! Over half the green belt is agricultural and golf courses account for 7%.

    There is enough green belt land in Greater London to build 1.6m houses at average densities, says Paul Cheshire of the London School of Economics (LSE) — about 30 times the number of new houses London needs a year. The Economist says on one count that there are ten protected views of St Paul’s Cathedral, including one from a specific oak tree on Hampstead Heath. It also says that according to the Centre for London (CFL), a think-tank, the disposable income of private renters in inner London dropped by 28% between 2001 and 2011. Over the last full economic cycle, from 1993 to 2008, the cost of a hectare of residential land in London increased by over 300% in real terms, to more than £8m.

    The UK as a whole has a current house build of about 140,000 and has been underbuilding for decades, boosting prices and distorting the economy.

    This imbalance will only be addressed if politicians have the guts to confront vested interests.

    The UK needs to continue to attract foreign investment but its over-reliance on FDI is a problem as is the low level of R&D — foreign firms account for more than half the business spending on R&D.

    I will add a post on trade on Thursday.

    1. “he said that the funding of the UK’s persistent current account deficit is dependent on the “kindness of strangers.”

      I think this is wrong.

      To quote Neil Wilson, who puts it clearer than I would:

      “A current account deficit isn’t funded. For it to exists at all it must already have been funded. Every short has to have a corresponding long. Similarly for every excess import of goods and services into a currency zone there has to be a corresponding external sector held asset denominated in the currency of the import zone. One cannot exist without the other. It is a simultaneous requirement in a floating system. If any step along the way fails the whole deal falls through, eliminating both sides instantly.”

      https://medium.com/modern-money-matters/a-sterling-performance-9014fc1dba98#.w7a88depg

  3. I reckon the deficit was acceptable as long as the market felt political leadership was competent. And it would no longer appear to be.

  4. Michael, with banks adopting the rhythm method in London there may be plenty of rental and for sale capacity coming to the market soon. A Brexity England does not need a very big London.

  5. Modelling British trade post-Brexit would not be easy and the childish optimism of the leading Brexiter ministers that there are easy trade opportunities for British firms in distant lands, was recently dismissed by a Tory MP as “a romanticised 1950s vision of Britain, a country of imperialist chauvinism” while Nick Herbert called the ministers “the three blind mice.”

    Cameron/Osborne had a goal that the UK would double exports to £1 trillion by 2020 — that too was a fantasy even though UK business dynamism in terms of startups and the number of exporting firms is much higher than Ireland’s, relative to the economies.

    More than half UK’s exports to China comprise cars made by foreign firms and the re-export of gold.

    A relatively high proportion of UK exports of goods to the EU27 are components manufactured in the UK for onward assembly elsewhere in the EU. Some components cross the UK border more than once.

    New car models require big investments and the UK may have to subsidise the foreign companies that control the biggest merchandise export.

    The FT says half of the UK’s trade surplus in financial services — worth some £18.5bn in 2014 — comes from exports to the EU. London dominates across multiple niche areas of finance. It does 78% of the EU’s foreign exchange business and 74% of over-the-counter interest rate derivatives; 59% of international insurance premiums are written in London; and 85% of the EU’s hedge fund assets and 64% of private equity assets are managed in the city.

    The UK’s total R&D spend of 1.70% of GDP was less than the EU28 average of 2.03% of GDP on R&D in 2014 — foreign firms accounted for 52% of UK business R&D spending (BERD) in 2014 with drugs and cars accounting for 32% of BERD.

    France’s total R&D rate was 2.26%; Germany’s 2.87%; In 2012 US was at 2.81% and Switzerland was at 2.97%; Japan was at 3.47% in 2013 and South Korea was at 4.15% while China ex-HK was at 2.08%. Sweden was at 3.05% in 2014 and Denmark was at 3.05%.

    The UK BERD GDP ratio of 1.09% compared with the EU28 at 1.30%; Germany & Denmark at 1.95%; US at 1.96% (2012); Switzerland at 2.05% (2012) Japan was at 2.64% in 2013 while China ex-HK was at 1.60%. South Korea was at 3.26% in 2013 ; Sweden was at 2.15% and France was at 1.46% in 2014.

    Money in itself does not create successful innovation but it matters.

    On trade, an article here says that UK services industries account for 44% of total exports yet the OECD estimates that in 2011 (the latest data available) 52% of the value added in UK exports was generated by domestic service sector firms.

    http://voxeu.org/article/uk-s-new-trade-priorities

  6. How do economists model binary disaster choice where the rational agent has been disable by excessive exposure to the Daily Mai? . If Ceteris is the City losing Euro clearing there may be no paribus. And equilibrium may be a long time coming.

Comments are closed.