The UK has, for decades, had a balance of payments (‘on current account’) problem. As a nation we have consumed more by way of imports than we have been able to pay for via our export earnings.
This was true of the 1960s and 1970s, but disappeared briefly in the 1980s, when our North Sea oil came on stream. In recent years the deficit on current account has reappeared with a vengeance.
The Office for National Statistics time series graph is a vivid depiction of a deep malaise. Since the turn of the century the average deficit on current account has been £5.56bn per annum. However, this problem is rarely flagged up in the media these days – far less so than in the 1960s when a much smaller deficit was said to be a significant problem.
The trade deficit conundrum
The essence of the problem is the trade in goods, where the deficit tends to be large. Aside from this ‘visible trade’ there is the ‘invisible account’ that covers the trade in services. Here the UK tends to perform rather better – for example, the City of London is very good at providing financial services to the world (think: insurance, banking etc). The surplus on ‘invisibles’ is rarely enough to cover the deficit on trade in goods – so the accounts have to be squared some other way.
Another element involved in the balance of payments is ‘the capital account’. If the UK government can persuade overseas governments or financial institutions to invest in UK government bonds, then this provides an inflow of funds (albeit borrowed!) to help offset the current account deficit. Additionally, the UK might attract foreign direct investment – overseas entrepreneurs choosing to invest in UK companies. This has the same effect
So far, so good. BUT – there are snags along the way.
Potential pitfalls
To induce foreign investors to buy UK government stock requires the UK government to be regarded as a ‘safe bet’. There has to be confidence that UK fiscal policy is sound and that the interest rate offered on the stock is commensurate with the risk. A thoroughly Keynesian policy of responsible government intervention to regenerate the economy may be what is needed; but in a world dominated by ‘mediamacro’ (the mistaken narrative, common in the media, that running a national economy is just the same as running a household budget), the government might shrink from engaging in such for fear of upsetting the bond markets.
If overseas investor confidence dips, then the Bank of England may be obliged to raise interest rates to compensate – this will have all sorts of negative impacts elsewhere in the economy. UK firms intending to invest in plant and machinery may put their investment plans on hold, whilst householders with mortgages will be hit. The cost of servicing UK government debt held overseas will rise – adding to the outflow on the current account. This is a vulnerability that the UK has to a greater degree than any other major economy.
As the former Bank of England governor, Mark Carney famously remarked, Britain is reliant on “the kindness of strangers”.
Foreign direct investment into UK companies is a double-edged sword. On the positive side, let us assume an emerging company in the UK high-tech sector receives a chunk of investment cash from a foreign entrepreneur. The firm continues to produce in the UK, grows and thrives. That is all to the good. Too often, however, such emerging high-tech companies are bought out by American corporates, and sooner or later are shifted across the Atlantic to become a new gem in the US high-tech crown.
Subject to the will of America
Vassal State: How America runs Britain is a recently published book by Angus Hanton in which the author records a series of US buy-outs. For example, DeepMind was a path-breaking UK artificial intelligence company that is now owned by Google. Last year American companies enjoyed a $12.7bn dollar spending spree on Cambridge University companies alone. Such purchases enable the UK to offset its deficit on its balance of payments current account, but at a huge cost to Britain’s prospects as flourishing high-tech producer. I believe this is worse than selling off the family silver, it is selling off our future.
Hanton’s book produces several other instances of the UK being ‘in hock’ to the USA, and the term ‘vassalage’ is brought into use. I find that an irony. Those who advocated Brexit argued ferociously against the UK, post Brexit, remaining in the EU single market or customs union. Their argument was that we would have to be rule-takers with no say in the rules. We would be in a position of vassalage.
The Brexiter alternative was for the UK to move closer to the USA – their nirvana being a USA-UK trade deal. Hanton’s book spells out in detail just the extent to which the UK has already become a US vassal state.
The state of the UK balance of international payments is just one dimension of an economy that is failing. But failure is not inevitable. A wise government with determination and courage could devise and implement a transformational policy.
Two years ago, the Labour Party in opposition had the makings of such a policy – its Green Investment Plan. Sadly, this has been dropped and an early step in the right direction would be to resurrect it.
The naysayers and doomsters have to be confronted, and a more Keynesian, more redistributive policy adopted. A thoroughgoing industrial policy with the government working in tandem with the private sector would give a real prospect of growth, including growth of exports. And of course, the latter would be assisted by reversing the worst aspects of Brexit.
