#70. Britain’s disappearing economy


There are times when the very sanity of those running the British economy has to be called into question.

If you think this verdict extreme, please consider the following.

1. Dependent on foreign creditors. The British economy is run “on tick”, in that the current level of consumption requires huge (and growing) subsidies from overseas creditors. In the latest quarter, these creditor subsidies reached a staggering 7% of GDP, and averaged 5.2% in 2015 as a whole.

2. A downwards spiral. This dependency on foreign creditors – which has totalled an enormous £350bn over just five years, and almost £200bn in 2014 and 2015 alone – has been funded by overseas borrowing and the sale of assets, each of which automatically creates streams of future financial outflows (in the form either of interest or of profits).

3. Economic illiteracy. Those who manage the British economy are quite incapable of distinguishing between the creation of value and the recycling of value. Thus, it doesn’t – in their opinion – matter one jot if a value-creating manufacturing job is lost, provided that it is replaced by a value-recycling job (such as a waiter, an estate agent or a “manager”).

4. The abdication of economic sovereignty. Dependency on foreign creditors imposes a straitjacket on policy – for example, and despite what is happening at Port Talbot, a British government that habitually grovels to China is reported to have opposed EU plans to impose anti-dumping tariffs on Chinese steel.

5. Delusions of grandeur. With both the government, and the economy as a whole, running huge deficits, Whitehall spends its time dreaming up extravagant projects – such as HS2, and the replacement of Trident – which the country simply could not afford, even supposing that either investment made sense.

6. Gross neglect. An impending energy squeeze is all but ignored, with the solitary exception of steadfast support for the folly that is Hinckley C.

Finally, the people responsible for this near-disastrous state of affairs actually seem to believe that this situation is indefinitely sustainable, so long as Britain keeps on borrowing from abroad, flogging off its asset base and currying favour with wealthy foreigners.

This has been a week in which chickens have started coming home to roost. In addition to intense anger about the threatened closure of the Port Talbot steelworks, official statistics have reiterated the extent to which the British economy lives ‘on tick’. Whilst President Obama’s criticism of Mr Cameron over Libya was unfair, the broader charge – of British freeloading on the American taxpayer over defence – is undoubtedly valid.

More broadly, though, the British economy as a whole is freeloading, on foreign lenders and overseas buyers of British assets. Not only is this unsustainable, but it creates an ever-larger stream of future financial outflows which shows every likelihood of turning into a lethal spiral.

Let’s start with the current account, which is a prime indicator for the state of the economy. This is illustrated in the following chart.

Bop 2000-15

Source of data: Office for National Statistics

Essentially, the current account measures the financial relationship between the British economy and the rest of the world. Back in 2005, this was a small deficit (£17bn). In 2015, however, this deficit stood at £96bn, equivalent to 5.2% of GDP (though in the final quarter it reached a horrific 7%).

This means that more than 5% of Britain’s consumption – which is one definition of GDP – now comes courtesy of foreign creditors.

Of course, these overseas creditors do not subsidise British consumption out of the goodness of their hearts – the difference has to be matched by inflows in the financial account. What this in turn means is that, last year, Britain subsidised its consumption through a combination of overseas borrowing and the sale of assets, to the tune of £97bn.

Over just five years, the total extent to which Britain has inflated its standard of living, through borrowing and selling off assets to fund a current account shortfall, is £350bn.

This, put simply, is the extent to which Britain is living beyond its means.

(If you do think this is in any way sustainable, by the way, there are lots of nice men who would like to play poker with you).

There is, of course, an even nastier sting in the tail of this kind of recklessness. To understand this, take another look at the chart. As you will see, the chart divides the current account into two components – the balance of trade, and a category labelled “income”. The latter, termed by the statisticians “primary and secondary income”, is dominated by the total of interest and profits paid to the foreign owners of British assets and debt, net of equivalent income from abroad.

As the chart shows, the trade deficit, though persistent, has been relatively static – in fact, it was £36bn both in 2005 and in 2015.

The big difference between those years has been a massive deterioration in the “income” component. Back in 2005, Britain earned a net £19.8bn from overseas investments, offsetting a £36.4bn trade deficit to leave the current account a modest £16.6bn in the red.

Between 2005 and 2015, however, the balance of income swung massively, from a surplus of £19.8bn to a deficit of £59.6bn, which means that we are now adding a financial outflow of almost £60bn to a trade deficit of £36bn, resulting in a total current account deficit of £96bn.

If you have any grasp of financial flows, this should worry you – and the reason for it should worry you even more.

Essentially, when you sell an asset or borrow money, you create a future outward flow of profits and interest.

What this in turn means is that, each time Britain fills a current account gap by borrowing or by flogging off assets, it commits to future outflows such that the future current account deficit widens automatically. Thus, the £80bn swing in in the income account – from a surplus of £20bn in 2005 to a deficit of £60bn last year – is a direct consequence of the process of selling assets and borrowing from overseas.

Of course, if you work in Westminster or Whitehall, you don’t let this worry you. You certainly don’t tell the public how dangerous and unsustainable this is. Above all, you don’t admit that Britain is living drastically beyond its means. Instead, you come up with excuses (“the weakness of the Eurozone economy”), and you curry favour with wealthy foreigners, typified most recently by the grovel-fest laid on for Chinese leaders last autumn. The rest of the time, you dream about how to spend even more money that the country doesn’t have on, for example, HS2 and the replacement of Trident.

Even if Britain had the money for either – which, clearly, it doesn’t – both of these schemes come close to a definition of madness. As well as being unaffordable, HS2 is the wrong priority, when Britain needs better rail links across the North (for instance, connecting Manchester and Liverpool with Leeds, Sheffield and Newcastle), and also needs to tackle a huge backlog in the upkeep and repair of its roads.

As for Trident, the current system theoretically enables Britain to obliterate Murmansk or St Petersburg, with the inevitable implication that Manchester, London or Birmingham will be turned into a pile of radioactive rubble by an opponent with vastly larger numbers of warheads. Since I simply don’t believe that any British leader in his right mind would do this, I favour a more affordable, more flexible nuclear capability, such as nuclear-armed cruise missiles fired from submarines or warships. And, rather than spending money that Britain doesn’t have on a system it could never use, I would much rather see greatly increased spending on conventional armed forces.

The publication of the truly horrific current account numbers for the final quarter of 2015 has coincided with the grim news from Port Talbot, where the steelworks clearly stands in grave danger of closure.

The immediate reason for the threat is the dumping of steel by the Chinese, which is something that Britain seems highly unlikely to counter. According to the government, providing state assistance is not possible because of restrictions imposed by the European Union – an ironic comment, coming as it does from ministers who, in the main, believe that Britain should vote to remain in the EU.

One might speculate that British grovelling to China for investment effectively rules out taking a tough line with the Chinese over dumping. It has been reported that Britain has opposed EU-wide action on the issue. If this report is true, then ministers have (a) been telling the public that they cannot act against Chinese dumping because of the EU, whilst (b) trying to dissuade the EU from taking precisely that action.

The Port Talbot works also suffers from two other, “made in Britain” handicaps. The first is a malign form of taxation – Business Rates, a ludicrous tax levied irrespective of profitability or even sales. The second is energy costs which, for industrial users, are far higher than those paid by European competitors.

At this point, a rational government would be doing four main things.

It would be adjusting energy charges to reduce or eliminate the extent to which industrial consumers subsidise household users.

It would be reforming – or preferably scrapping altogether – the absurd system of Business Rates, replacing it with a higher level of Corporation Tax.

It would be taking action over Chinese dumping of steel.

And it would be providing Tata – an excellent company, by the way – with financial support sufficient to keep Port Talbot viable whilst these essential measures are implemented.

In reality, none of these things is likely to be done. At root, the problem is a familiar Whitehall ignorance which believes that manufacturing doesn’t really matter very much.

Whitehall, you see, all too easily believes that a job lost in manufacturing doesn’t matter if, instead, we employ an additional estate agent, “manager” or pizza-delivery driver. This misapprehension – perhaps fostered by the way in which all jobs are aggregated together in statistical publications – reveals gross ignorance, not just of supply-chain considerations but also of the process by which value is added in the economy.

In short, government does not understand the difference between creating value and simply recycling it.

What has been happening has been a hollowing out of the British economy, with asset ownership being traded for short-term consumption, whilst high value-added jobs have been replaced by more peripheral, casual and lower-paid employment.

Of course, I might be accused of venting pointless frustration, because, in practical terms, it may already be too late – not just for Port Talbot, but also for a British economy managed on the assumption that a country can live ‘on tick’ indefinitely.

The point is drawing ever nearer when some very nasty events occur. I will leave you to ponder what these nasty consequences might be, suggesting that you consider the possibility of a sharp fall in Sterling, a sharp rise in Britain’s cost of borrowing, and a simple inability to go on selling assets or borrowing from abroad.

Conceivably, there may be someone reading this who believes that this will never happen, and that the UK can continue indefinitely to live far beyond its means. If so, that person has all the qualities of vision and understanding to qualify for a top job in government.

For everyone else in Britain, the outlook is grim. Living beyond one’s means is not a sustainable policy.

For far too long, Britain has been governed by people whose approach to economics makes the Charge of the Light Brigade look like a sensible military operation.