Benefits Spending Propping Up the UK Economy

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Figures show how benefits are driving government expenditure, on which UK economic growth now depends.

Digging into the latest UK GDP data uncovers an extraordinary rise in spending on benefits, to the extent that it is propping up the UK economy.

Analysis from Lloyds Bank shows "government spending has advanced much faster than the performance of the overall economy over the last year.

"This coincides with separate data earlier this week from the Department for Work and Pensions showing that claimants of Universal Credit have risen from 6.9mn to 8.0mn over the same period," says Lloyds in a regular financial markets briefing, issued Friday, August 15.

Economists explain that part of that may reflect transfers in from other benefits rather than just being a function of outright new claimants of working age benefits.

"But the chart shows that overall spending on social protection, and indeed general government spending in total, is running a long way ahead of economic growth. It is another reminder, as if one were needed, of the scale of the fiscal challenge that will have to be addressed at the Autumn Budget," says Lloyds.

The ONS on Thursday issued its first estimate of GDP for the second quarter, telling us the UK economy expanded 0.3% quarter-on-quarter, exceeding estimates for 0.1%.

The news helped the British Pound advance against most peers, ensuring it stands as the best performing major currency for August.

Yet, economists soon pointed out that behind the headlines lay a set of data that "does not look particularly encouraging," according to Lloyds.

The bank points out that of the 0.3% q/q headline, almost all of it (0.27ppts) can be explained by government consumption, and just 0.06ppts is attributable to household consumption.

"Furthermore, whilst overall investment was broadly flat, that masks a decline in business investment, a drag of 0.41ppts indeed, offset by some inventory build and erratic components," says Lloyds.