From the archive: Why are the Tories (trade) deficit deniers?

Michael Harris /   November 3, 2015 at 7:27 PM 1,950 views

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One of the characteristics of Tory governments is widening trade deficits. It reveals the fundamental flaws in Tory economics.

Today’s figures from the British Chambers of Commerce suggest that British export sales and orders are now at their weakest in six years (Q2 2009, to be precise).

Certainly, the continuing economic problems in the eurozone and many emerging markets including China haven’t helped. But as the BCC says, British businesses aren’t being helped by this Government either. Here’s John Longworth, its director general:

“These figures make it clear that the UK’s export drive is at risk of going into reverse gear, precisely at the time when it needs to be moving forward. Many firms are currently operating at capacity and are in need of support to invest in machinery or staff. Those businesses considering taking the leap and breaking into new markets desperately need access to the growth funding and working capital to enable this transformation.”

Longworth has said that David Cameron’s ambition of £1 trillion in exports by 2020, set out in 2012, is simply not going to happen. Indeed, by the BCC’s calculations, we’re 14 years behind meeting the target.

The simple reason is that the Tories don’t believe in investing in the economy, only deregulating it. The Tory economic ‘vision’ is of Britain competing in a race to the bottom. The sensible alternatives – such as sufficient regulation to ensure that businesses compete on quality and innovation, and public investment in productivity in the form of education, skills and infrastructure – are anathema. It is an ideology of disinvestment, one that made the recession longer and deeper than it needed to be.

It’s why the Tories are ultimately destroyers, not builders.

Look at the evidence. The UK first generated a current account deficit (a broader measure of trade and income) in 1984. This followed the first Thatcher recession and particularly its laissez-faire (some have suggested, deliberate attack on) manufacturing, which of course tends to be more unionised than the service sector. The current account deficit is now nearly 60 times as large, at nearly £93 billion. Since 2010, the current account deficit has more than doubled.

The typical Tory response to this dramatic failure has been to claim that it doesn’t really matter, which is to say denial. (Coincidentally, today also saw the biggest takeover of a British technology company since 2011, with US video game publisher Activision Blizzard buying King Digital, the British creator of Candy Crush.)

On most days, City commentators and business correspondents tend to agree. For example, as I’ve noted before with regard to foreign takeovers of British companies, they argue that we live in a global economy and that if foreign companies and investors want to buy British firms we should take it as a compliment. Furthermore, UK firms and investors own more assets overseas than foreigners own here (though this should be the case, given that the UK is still the fifth or sixth biggest economy in the world).

Well, this complacency is now coming home to roost with the terrible trade and current account deficit numbers. It turns out that income from overseas investments has now fallen – meaning that it can’t anymore plug the gap in our consistently poor trade performance.

As Anthony Hilton (hardly a radical commentator) notes in today’s London Evening Standard:

“The amount of credit generated by our overseas investments fell 31% between 2011 and 2014 to £73 billion. At the same time, the amount sent to overseas owners of British-based assets went exactly the opposite way. It rose 31% to £71 billion. …The surge in the value of assets held here is a direct reflection on the willingness of the UK to sell anything that moves to a foreign buyer with a big chequebook and the ability of foreign buyers to run the assets well after buying them.”

The result is that the past five years have seen an astonishing decline in Britain’s overall trade performance so that in 2014 the deficit amounted to 5.1% of GDP – easily the worst performance since records began.

As Hilton concludes, the problem is that we don’t actually make much stuff these days that the rest of the world wants to buy, but that:

“We will not get that crown back at least until our Government provides German-style long-term support for business exporting at home and overseas and is willing to provide the necessary finance. And our Government does not believe in that sort of help.”

It’s no wonder then that the British economy hasn’t been rebalanced since 2010 (or even slightly tilted in the eight direction), as George Osborne has continually urged.

The manufacturing sector is now a smaller part of the economy than before the financial crisis, and there are now fewer jobs in industry. Relatedly, economic output in northern England is now a smaller proportion of overall economic output, while it’s larger for London and the south east. There’s also been no rebalancing from consumption to investment.

Whatever happened to Osborne’s ‘march of the makers’?

It’s turned into a retreat.

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