The UK should prepare to be a services-oriented economy in the future, rather than relying on its competitiveness in the banking sector, new research has shown.
According to a report by the Resolution Foundation, Britain’s economic advantage should not be based on financial services or manufacturing but a wider range of industries, including the arts, biomedical sciences, and intellectual property.
The report, which was done in collaboration with the LSE, funded by Nuffield Foundation, revealed that the UK stands out as a service-orientated nation, with the sector comprising nearly half of UK exports in 2019, or 47%.
This is around twice the OECD average of 25%, making the UK the second biggest exporter of services in the world.
The Foundation highlighted that although the UK is well-known for exporting financial and business services, accounting for 9% and 7% of total exports respectively, this was in decline during the period.
Financial services fell as a share of exports from 12% in 2009 to 9% a decade later, despite services growing from 44% to 47% over the same time frame.
The report added that the UK is highly specialised in personal, cultural and recreational services and charging for the use of intellectual property – specialisms which have seen average annual growth of around 6% over the past 10 years.
“While the UK stands out for being a broad-based services exporter, it also has notable advantages in several growing goods categories, including pharmaceuticals, beverages, aircraft and works of art,” it said.
“These four categories combined account for 8 per cent of UK total exports, worth $65.5bn in 2019.”
If the country was to shift its focus towards services, this reorientation would require huge additional investment of approximately 2% of GDP for a decade – in order to close the gap between the UK’s current position and the average levels of physical and human capital in manufacturing-dominant economies.
The Resolution Foundation called on the UK government to confront the particular challenges this will bring for gaps between people and places.
Workers in tradable services, such as banking, are 60% more likely than the average worker to be in the top 5% of earners. In contrast, workers in the tradable goods sector are more likely to be upper-middle earners.
Tradable services also tend to be concentrated in more productive areas of the country, with London both the most productive area and the largest exporter of services relative to the size of its economy.
The report warned that a focus on boosting these industries would reinforce spatial inequalities in the UK, unless action is taken to broaden their economic footprint.
“The UK has a more diverse range of economic strengths than many people think – from arts and aircraft, to biomedical sciences and beverages,” Krishan Shah, economist at the Resolution Foundation, said.
“An economic strategy which builds on these specialisms and innovates in areas close to the UK’s current mix of exports offers substantial gains, while reorienting the economy towards manufacturing – as some have encouraged – risks squandering the UK’s significant long-term economic strengths.
“At the same time, policy makers need to recognise that the UK’s export specialisms seem to reinforce pay inequality and regional gaps.”
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