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Is it useful to think of the UK economy as a single entity?

September 29th 2010

The international monetary fund (IMF) has concluded that the UK economy is now ‘on the mend’, but will proceed at a moderate pace as public sector cuts offset the gains of increased household consumption and boosted export demand. However it also concluded that there remain sizable risks such as ‘still-strained balance sheets among households’ and the possibility that ‘headwinds from fiscal consolidation could turn out to be more powerful than expected’.

Predictably the main political parties, the media and critics of the IMF have examined the preliminary conclusions of the IMF’s article 4 mission, cherry picking its findings to support their own conclusions. However what is largely missing is the question of whether it is conceptually useful to examine the economy of the UK as a whole.

It is well known and uncontroversial to point out that there are regional differences in the economy of the UK. To mention just a few;  London and the South east benefit from the financial industry and the city of London’s established reputation as a centre for international finance, the economy in Aberdeen and Northern Scotland has been shaped by the exploitation of North Sea oil, and the South Wales Valleys are inextricably linked with the rise and fall of mining. House prices, unemployment/economic inactivity statistics vary greatly between different regions, and the types of industry and work people do is also different in each region. Even within large geographical regions you get rural/urban divides in terms of economic activity.

So given this, just how useful is it to regard the economy of the UK as a single unit for analysis? Let us consider the alternative. Imagine the IMF had visited all the major regions of the UK (let’s say Scotland, Wales, Northern Ireland, and the regions of England such as the North West, Cornwall etc) and produced separate reports on the state of each local economy. Does anyone think the conclusions for each region would be broadly similar to the overall conclusions for the UK?*

It is quite likely that their conclusions on the Welsh economy would be considerably different. They would almost certainly highlight the ‘headwinds from fiscal consolidation’ as even more of a threat to economic recovery due to Wales’s smaller private sector. They might even indeed focus upon the ‘structural weaknesses’ of the economy, such as poor transport in parts of Wales, skills deficits and the proportion of people with health problems that prevent them participating in the labour market. These are of course weaknesses that can only be solved by investment in transport, education and health care.

* Assuming the criticisms of the IMF essentially prescribing the same medicine regardless of the disease are being unfair.

James Radcliffe is Policy and Research officer at the Bevan Foundation.

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