David Cameron has pledged to ‘rebalance’ the British economy, but are the scales as tilted as the Prime Minister suggests?

In his first speech on the economy since taking office, Mr Cameron said: “Our economy has become more and more unbalanced, with our fortunes hitched to a few industries in one corner of the country, while we let other sectors like manufacturing slide. “

Yet in today’s Independent Dominic Lawson questions the merit and indeed the requirement for such a move.

The Claim

Mr Lawson makes the point that manufacturing in the UK is not in as poor state as commonly thought, and indeed is not dominated by the financial sector.

He argues that "14 per cent of our gross domestic product is still attributable to manufacturing output" and that the financial services sector "has never contributed more than 8 per cent of GDP."

Analysis

Looking at the figures provided by the Office of National Statistics (ONS), the argument made by Mr Lawson checks out.

Although he talks about share of GDP, the contribution of different sectors to the economy is mostly measured in terms of Gross Value Added (GVA). As a spokesman for the ONS explained:

“When we look at the industry breakdown we tend to look at GVA, although the two can be used almost interchangably. If we looked at GDP we would need to add taxes and deduct subsidies at the industry level.”

Figures from the ONS ‘Blue Book’ on the UK’s National Accounts show that in 2007 manufacturing contributed £154.9 billion or 12.4 per cent of GVA.

Financial services, accounted for here as ‘financial intermediation’, totalled £103.6 billion, or 8.3 per cent of GVA.

Such figures back up Mr Lawson's point about the relative size of the manufacturing and financial sectors. However they show that his point that the City has never accounted for more than 8 per cent of GDP, is not strictly accurate.

In 2006 for instance the share of GDP accounted for by the financial sector was recorded 9.4 per cent.

There is also a wider point about the role of manufacturing and the rest of the economy. Just as manufacturing comprises a range of different industries, if financial services is considered as part of financial and business services, a different picture emerges.

ONS figures show that for 2007 the financial and businesses services sector accounted for 31.9 per cent of GVA (£397 billion) compared to 12.4 per cent for manufacturing.

Yet while the graphs in the Blue Book give the impression that finance alone accounts for this 31.9% share of GVA, it includes a number of other things, that would not be commonly considered part of the City. As Victoria Redwood of Capital Economics told us:

“The 30 per cent figure, while including services such as accountancy also includes businesses such as legal, IT and consultancy services.

But when only considering banks and hedge funds their share of the economy would be closer to the 8 per cent figure.”

Conclusion

The point made by Dominic Lawson about the relative size of the financial and manufacturing sectors in the economy is an important one in the context of the debate about ‘rebalancing’ the economy.

Saving for slight discrepancies, the statistics he uses are broadly accurate, although they do not take into account the growth in the share of GVA from the financial services while manufacturing has remained broadly static.

Nevertheless given the impact the banking crisis had on the UK due to the relative size of its financial sector, there will still be those who feel that a rebalancing of the economy is necessary.

As David Frost, Director General of the British Chambers of Commerce said in reaction to David Cameron’s speech:

“The Prime Minister is absolutely right to lead from the front and focus this government’s attention on rebalancing the economy in favour of manufacturing and the private sector.

“For too long the focus has been on consumption, debt, the public sector and financial services.”