In These New Times

A new paradigm for a post-imperial world

Britain is massively in debt

Posted by seumasach on June 9, 2011

 Here you can find the deadly truth about Britain and its coming economic implosion. We are in a deep, dank, black hole and have resolved to bomb our way out. All we need to crown our misery is a further run on the pound.

The scandalous way thrift is still losing out to profligacy

Jeremy Warner


9th June, 2011

The old ones are always the best, so I make no apologies for starting this column with Wilkins Micawber’s famous observation about the importance of living within your means:

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

The situation with Britain’s current account deficit is lamentably rather more serious than a mere six shilling overspend.

Last year we imported approximately £50bn more than we exported, or in Mr Micawber’s terms, we spent £50bn more than we earned.

Large though this number is, it wouldn’t be much of a concern if it was just a one off, but in fact Britain has been persistently living beyond its means for nearly thirty years now. To find the last recorded trade surplus in goods and services, you have to go as far back as 1982

The situation for the current account, which nets off transfer payments and the amounts Britain earns on its overseas investments, doesn’t look much better. There has been no current account surplus since 1984; what’s more, the cumulative deficit since then amounts to more than a half annual national income, or in round numbers, about £700bn.

How did we manage to pay for all this? Well, there’s been quite a bit of direct foreign investment in Britain, which is obviously a good thing, and much of the family silver has been sold off too, which is not so obviously beneficial. But the bulk of it has come from simply borrowing from those who are exporting to us – Europe, Asia and the Middle East. At almost every level, public as well as private, Britain is massively in debt.

The financial crisis should have been the wake-up call to do something about it, but ironically, in seeking to support demand the policy response has if anything made the situation worse, not better. In nominal terms, the trade gap keeps on breaking new records. This was not how it was meant to work.

One of the goals of the Bank of England’s post crisis policy of ultra-loose money, expected to be reconfirmed by the Monetary Policy Committee today, was to devalue the pound, thereby making British goods and services more competitive.

Yet the trade gains of this policy have so far been so marginal that you have to question whether they are worth the manifest inflationary cost. The positives have been much lower than the Bank anticipated, and the negatives much higher.

That pattern shows few signs of changing. The latest hike in gas prices is again quite a bit higher than the Bank anticipated in its last Inflation Report.

There’s been some improvement in net trade of late, but not of a magnitude you would expect given that the pound is now worth around 25pc less than its pre-crisis peaks. This is partly explained by the fact that the UK just doesn’t make things any longer, which has made the economy slow to respond to improvements in competitiveness. Just as important, services tend not to be as price sensitive as goods. An economy with a large services sector is therefore likely to benefit less from devaluation than one still highly weighted to industrial production.

We perhaps need just to give the policy more time. That at least is what the Government and the Bank of England are banking on. If business investment and net trade don’t pick up in the way anticipated, forecasts of 2.5pc growth from next year onwards are toast, for output will get little help from household and government consumption.

It’s not always bad to run persistent current account deficits. Countries which are young and growing frequently need to borrow heavily from abroad to finance investment in infrastructure. Conversely, countries at the vanguard of the ageing phenomenon, such as Japan and Germany, need to be saving heavily, and therefore running consistent current account surpluses.

But investment in the future is not what Britain’s external debts have been spent on, or indeed those of the US, which in this regard is much like a larger version of Britain. Rather, the money has disappeared into unsustainable consumption and house price bubbles.

You’d think the financial crisis would have eradicated this phenomenon too, but in fact it hasn’t. Indeed, Office for Budget Responsibility forecasts for growth depend vitally on households continuing to borrow to spend. Household debt is expected to rise from £1.6 trillion this year to £2.1 trillion in four years time, or from 160pc of disposable income to 175pc, as consumers seek to protect living standards from the squeeze to incomes of high inflation.

Loose monetary policy connives in this perpetuation of the bad old ways. Far from improving the relative merits of saving, it has in fact done the reverse, for the effect of elevated inflation is to erode the real value of debt and saving in equal measure.

The Bank of England’s intention in keeping bank rate at just 0.5pc is to support demand, but by the by, it is also engineering a massive transfer of wealth from savers to borrowers, or to use more moralistic terminology, from the thrifty to the profligate.

At the centre of the policy response to the crisis is a giant flaw – that in seeking to address the crisis in demand, policymakers are only sowing the seeds for the next one. Hey ho.

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