Time was when I was much younger
that a “Balance of Payments deficit” sank governments in the 1960s. Harold Wilson
was embarrassed to have had to devalue following a £300m Current Account
deficit, where the devaluation, arguably, lost him the 1970 General
Election. The Heath Government avoided
the embarrassment of a formal devaluation by allowing Sterling to float, but
still lost the 1974 General Election.
The ending of capital controls changed all this. Current Account deficits ceased to matter
much, and became easily financeable by capital flows. It became general practice for the mature
economies of the West to borrow the savings of surplus, mostly Asian, emerging
This was in many ways a positive
for world growth and world trade as it addressed the imbalances of too much
saving in Asia, and China in particular, and too much consumption in the West –
led by the USA and UK. So we all forgot
about Current Account deficits and the Savings Rate. In the UK, this supported an
artificially prolonged boom between 1992 and 2008, sustained by massive
increases in personal debt, financing unsustainable consumption growth; and
massive and unaffordable increases in Government spending. This has now blown up. Growth in the UK can now only come, for some
time, from higher investment and rising exports, rather than just more consumption
growth. Individuals are over-borrowed
and are attempting to de-gear. (Average
credit card debt per couple is still around £18,000).
The compound Current Account
deficit since 1997 has been approximately £700b, much of which has also been
financed by hollowing out ownership within the UK economy. Many of our best companies have been sold. Our Utilities – particularly Power and Water – are largely foreign- owned, as a
result of which we are at the mercy of foreign company boards as regards their
policies towards investing in nuclear electricity generation.
From a domestic perspective, saving
and investment have been inadequate – saving to the extent of the cumulative
Current Account deficit. This argues for
instituting a Savings Policy, anyway needed, domestically, in order to finance the
needs of an ageing population, with people being retired much longer. My rough and ready view is that our
Savings’ Rate should average around 10% of GDP.
There is clearly an argument not to achieve this quite yet, as it would
further reduce consumption in the short term; albeit that with material
personal debt reduction now occurring, it is slightly unclear as to what the
current Savings’ Rate is.
This should also make sense
globally, as China is embarked on switching to consumption to sustain economic
growth, where its “excessive” Savings Rate and Current Account Surplus are
already starting to decline, and should decline materially over the next
decade. So “the West” will need to have
a lower, offsetting, Current Account deficit and higher Savings Rate.
This territory is also an important
factor in the breakdown of the Eurozone.
Because the less competitive economies of Southern Europe, as members of
the Euro, cannot devalue they, too, have built up a growing and substantial
Current Account deficit – mostly with Northern Europe. For a decade the banks of Northern Europe
were happy to lend to the economies of Southern Europe to finance this; but
when their credit worthiness was called into question, this all stopped, with
banks retiring their loans. Within their
own economies much of this has had to be made up by Central Bank finance. Ironically, through the Euro, “Target”,
Clearing System, the financing of the Central Banks of Southern Europe has
ended up, largely, with the Bundesbank, which is now owed of the order of
The UK is better placed because we
have our own currency and can, and have, allowed it to depreciate to restore
our competitiveness. But we face a
decade during which any decent growth will need to come from rising exports and
increased capital investment. The financing
of some of the latter can reasonably be provided by the various international
Sovereign Wealth Funds; but in the interests of financial stability and better
long-term growth, we will need to return to an adequate Savings’ Rate, and to
reduce our on-going Current Account deficit.