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Why the UK economy could perform much better than it does at present

By John Mills, 

The table below summarises the balance of payments data published by the Office for National Statistics (ONS) on 29th March 2017.  Despite some improvement in the UK’s foreign payments outturn for 2017, no doubt largely due to sterling devaluation post the Brexit vote, the overall position remains very unbalanced.

UK Balance of Payments Breakdown – Net Figures in £bn

Year  Goods Balance Services Balance Trade Balance Net Income Net Transfers Balance of Payments
2007 -89.9 51.8 -38.1 -7.2 -13.1 -58.3
2008 -94.4 49.3 -45.1 -14.6 -13.2 -72.9
2009 -86.4 53.0 -33.5 -11.5 -14.8 -59.8
2010 -97.2 56.0 -41.2 1.1 -19.6 -59.7
2011 -94.8 69.6 -25.2 6.5 -20.3 -38.9
2012 -108.7 75.3 -33.4 -17.8 -20.4 -71.6
2013 -119.8 84.4 -35.4 -36.4 -25.3 -97.0
2014 -123.1 86.3 -36.8 -37.8 -23.4 -98.0
2015 -118.6 86.3 -32.4 -42.9 -22.8 -98.1
2016 -135.5 94.8 -40.7 -50.4 -22.5 -113.6
2017 -135.6 107.0 -28.6 -33.3 -21.0 -82.9

Source: Time Series Dataset. London: ONS, March 2018

 

Despite the more competitive level of sterling during most of 2017, there was no appreciable improvement in the visible trade balance. Clearly the depreciation of sterling was too little to trigger a significant increase in investment in new manufacturing capacity. Services, on the other hand – no doubt because they are much less price sensitive than manufactured goods - continued their secular advance, the result being a £12bn improvement in the trade balance. Another significant improvement was on net income from abroad, which is very sensitive to the exchange rate. The lower the parity the better the ratio between the value of UK profits remitted abroad and those earned overseas coming back to the UK. The UK, however, still chalked up an overall balance of payments deficit of well over £80bn in 2017.

The next table shows the latest figures, covering all of 2017, for borrowing and lending between the main sectors of the economy. The most striking feature is the huge change from Households as net lenders to the rest of the economy to being net borrowers – a swing of over £30bn between 2016 and 2017. Corporations, however, borrowed £30bn less in 2017 than in 2016. These two changes allowed government borrowing to fall by about the same amount as the reduction in the overall balance of payments deficit.

 

UK Net Lending (+) and Net Borrowing (-) by Sector in £bn

Year Public Sector Corporations Households Rest of the world Totals
2008 -76.4 -25.3 29,1 72.6 0
2009 -159.6 18.3  81.8 59.5 0
2010 -150.3 4.1 85.7 60.4 0
2011 -123.6 23.5 60.4 39.7 0
2012 -138.5 3.7 62.6 72.2 0
2013 -97.6 -46.3 45.8 98.2 0
2014 -103.9 -36.6 40.6 100.0 0
2015 -81.0 -75.8 56.6 100.1 0
2016 -64.5 -62.4 20.2 115.3 8.6
2017 -44.4 -30.2 -12.1 84.2 -2.4

Source:  Time Series data supporting ONS Quarterly National Accounts 2017 Q4. London: ONS, March 2018. Figures for 2016 and 2017 are still being reconciled by ONS and the net totals will also be at or very close to zero when this process is complete.

 

These trends, however, both show how vulnerable the UK economy really is.  Households are currently borrowing very heavily to support living standards they are not earning while substantially decreased Corporation borrowing reflects low levels of investment. The UK economy is far too dependent on consumer demand instead of net trade and expenditure on new machinery and factories.

Another major imbalance is also cause for serious worry. This is our huge balance of payments deficit with the EU27. A breakdown is available at the top of the next page. In 2017, whereas we had a balance of payments surplus with the Rest of the World of £12.7bn, we had a deficit with the EU27 of £95.6bn – more than the UK’s total overall deficit of £82.9bn. This is because sterling is – and has been for a long time – much too strong against the euro to enable us to hold our own in our trade with the EU. Not only, however, do we have a trade deficit with the EU27. As the table below shows, we also have large income and transfer deficits. We have a big negative income balance with the EU27, caused by the cumulative effect of our selling off assets to finance our payments deficit and losing the returns on them. We have also for many years paid far more to the EU budgets than we have received back.

 

Balances between the UK and the EU27 in £bn

Year  Net Goods Net Services Trade Balance Primary Income Secondary Income Totals
2008 -40.1 8.4 -31.7 -2.6 -5.0 -39.3
2009 -39.7 10.1 -29.6 -13.5 -6.6 -49.8
2010 -43.4 13.7 -29.7 -17.6 -10.2 -57.5
2011 -39.3 18.5 -20.8 -19.4 -10.2 -50.4
2012 -57.3 16.0 -41.4 -33.1 -10.5 -85.0
2013 -68.5 13.9 -54.6 -35.3 -12.6 -102.5
2014 -78.1 21.1 -57.0 -39.5 -10.5 -107.0
2015 -87.0 21.1 -66.0 -24.7 -11.7 -102.3
2016 -96.5 16.8 -79.7 -24.2 -10.5 -114.4
2017 -94.7 23.1 -71.6 -14.9 -9.1 -95.6

Source: ONS Time Series Dataset. London: ONS, March 2018

 

The overall result is that during the last ten years not only have we had a cumulative deficit with the EU27 of over £800bn; but we have also lost control of large swathes of our economy. We have also had to make good the demand thus sucked out of our economy by borrowing and running up much too much debt. At the same time, we have allowed ourselves to deindustrialise to a point where we cannot pay our way in the world, nor provide our population with nearly enough good jobs, nor achieve sufficient productivity growth to raise most peoples’ real incomes.

This all has a heavy – although apparently so far almost entirely unrecognised – bearing on the Brexit negotiations currently in train.  To make Brexit a success, we need a much lower exchange rate generally, but particularly against the euro. To enable the UK economy to flourish the way it should, we need the pound to fall to around €0.85 and $1.00. Crucially, we need to make it profitable to site new manufacturing facilities in the UK instead of in Germany, the Netherlands or China. To do this, we need to make manufacturing sufficiently profitable to attract large volumes of new investment, very probably to be accomplished largely by a new wave of talented people attracted to manufacturing in the UK because they can see previously unavailable opportunities for making more money in manufacturing than in the service sector.

Because of the increases in productivity which would be achievable from much higher levels of the types of investment typical of light manufacturing - mechanisation, technology and power, the sectors which produce large increases in output per hour - it would be possible to get the economy to expand cumulatively at 3% to 4% per annum – a far higher rate than is in prospect with current policies. This would enable there to be real wage and salary increases for almost everyone, net of inflation. By concentrating new industry mostly out of London and the South East, we would then be able to start redressing the huge regional imbalances from which he UK economy currently suffers. By combining industrial with social investment – in schools, hospitals, road, rail and housing – and providing  a much better range of jobs - we should be able to alleviate at least the worst of the problems faced by the millennial generation.

If we really want to make a success of Brexit, therefore, here is a set of achievable targets at which we ought to be aiming:

Investment  We need to get the percentage of UK GDP spent on investment up from less than 16% to well above 20% - closer to the world average of 26%.

Reindustrialisation  We should get the proportion of GDP derived from manufacturing up from its current less than 10% to at least 15%.

Balance of Payments  We should aim to have a small trade surplus and an overall balance of payments deficit of no more than around 2% of GDP.

Debt  We should reduce the government deficit as a percentage of GDP to below the growth rate – the condition necessary to bring it down on a sustainable basis.

Equality  We should get the rate at which the real wage is rising above the net return on capital – the condition which has to be fulfilled to stop the wage share falling.

Growth  We should ensure that the economy grows on a sustainable basis by 3% to 4% per annum – the only way to get wages net of inflation rising for almost everyone.

Inflation  We should abandon keeping inflation at an average of 2% as our main economic target, but we should expect to keep it below 3% to 4%.

Employment  We should aim to keep unemployment at no more than around 4% of the labour force, and  hopefully rather less.

There is nothing magical about any of this. Many other countries consistently do as well as this or better. It is only mistaken policies and priorities which are holding us back in the UK. Why don’t we determine to do much better?

Labour Leave shares a number of viewpoints from external commentators, both Leave and Remain, without necessarily endorsing any of the viewpoints therein.


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