BRITAIN faces tight fiscal policies "for five to ten years" and will need to reduce its dependence on financial services to rebalance its economy, a leading member of the Bank of England's monetary policy committee warned in Scotland last night.
Economist Dr Andrew Sentance, an independent member of the MPC, said that we cannot expect financial and related activities "to be such a powerful engine of growth in the coming recovery. Other sectors will need to take up the running".
His rema
rks, coming on the day when First Minister Alex Salmond opened the headquarters of Tesco Personal Finance in Edinburgh, will be seen as a direct challenge to recent remarks by the Scottish Government and in particular its Financial Services Advisory Board (FiSAB) which have sought to downplay the impact of the global credit crisis on Scotland's financial sector.
Sentance, speaking at a Scottish Council for Development and Industry (SCDI) dinner in Aberdeen, warned that the two main growth engines of the UK economy over the past decade – consumer spending and financial services – are likely to be much weaker sources of growth as the economy rebalances over the coming recovery.
"Other internationally trading sectors will need to pick up the baton from financial services – notably manufacturing industry. And the prospect of weaker consumer demand means that the UK recovery is likely to be more dependent on overseas demand and the growth in investment," he said.
The late 1990s and early to mid 2000s, he said, saw not only a global credit boom, but also a broader expansion in the size of the financial sector and related business activities. During this period, the share of financial and business services in UK gross domestic product rose from 17 per cent to about 25 per cent.
"As the financial sector and related activities adjust to the changed circumstances in the wake of the current financial crisis, we cannot expect these sectors to be such a powerful engine of growth in the coming recovery. Other sectors will need to take up the running."
Sentance's speech is set to ignite scrutiny of Scottish Government and Scottish Enterprise policies which have remained broadly unchanged since the onset of recession.
Critics argue that insufficient new thinking has been done on the new growth areas that could play a decisive part in leading us out of recession.
He also made clear that no early return to the pre-crisis years, when private consumer spending rose at an annual average rate of 3.5 per cent, can be expected. This, he pointed out, was a full percentage point over the longer run trend and represented the strongest ten-year period of household consumption since the war.
"In the wake of the current financial crisis," he argued, "we should expect to see a move in the opposite direction – subdued growth of private and public consumption.
"Fiscal consolidation will require restraint on the growth of public spending and, if taxes have to rise, it will have an impact on private consumer spending too. Given the scale of excess consumption which has built up over the last decade, and the large fiscal imbalances now apparent, tight fiscal policies are likely to need to be sustained for five to ten years."
