Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004 and led for the Opposition on the FSMA. He is now chairman of Flight & Partners Recovery Fund.
It is normally the case for growth in a mature economy to be led by consumption. But where Japan’s main problem over the last 20 years, causing economic stagnation, has been a lack of consumption growth, the UK’s problem has been the reverse – excessive consumption by both the public and private sectors.
In addition to, and substantially reflecting, unsustainable levels of borrowing by the private sector, for the last 15 years, the UK has had a substantial, regular current account deficit now amounting to some £700bn in aggregate. This has been financeable relatively easily, given the openness of the UK economy, but the net effect has been the sale of UK assets to foreign parties and an increase in the UK’s overseas indebtedness. From many angles there is nothing wrong with foreign entities owning UK assets; for businesses, the employment benefits are far greater than those of ownership. It has been Japanese and, subsequently, Indian, ownership which has made such a success of the car industry in the UK. Foreign parties paying high prices for Central London property is not the main cause of excessive UK property prices – rather, it is the artificial rationing of supply as a result of planning policies.
But, as is now clear, there are important political and strategic issues where utility companies – and particularly in the energy sector – are mostly overseas-owned. The UK no longer has the home-grown expertise to build a new nuclear power station. There is also the issue that the policy stance and objectives of non-UK owned businesses may be different to historic local preferences, as has been illustrated by the Kraft acquisition of Cadburys. Also, electors should not be surprised that internationally owned businesses will seek to structure themselves, within the law, to minimise their UK tax liabilities. Perhaps the most important point is that there is a finite supply of UK corporate and property assets to sell off to pay for our continuing overseas deficit, still running at some five per cent of GDP per annum.
The long term answer here is that the UK should have, on average, a savings ratio of approximately 10 per cent of GDP per annum to achieve a sustainable long term economic balance, whereas the average for the last 15 years has been substantially below this.
There are, of course, underlying problems that make this territory difficult. If China and other emerging economies continue to pursue export surplus, economic growth policies, other parts of the world have to run deficits for the world to be in balance. Internal devaluation measures can also lead to results worse than the problems they seek to solve. The Eurozone policy of grinding down the less competitive economies to force an external surplus have led to stagnant economies, unacceptable levels of unemployment and the worsening of Government debt problems, which in turn could also produce potential instability and/or political extremism.
In the latter context, UK Government policies which have been to “talk Hayek” but “act Keynes” have, arguably, been the best option in the short term and have underpinned economic recovery. The question for the UK is the extent to which the ongoing fiscal deficit of circa £120bn a year can be reduced by higher tax revenues resulting from better economic growth; and the extent to which a significant part of the fiscal deficit is structural, as implied by the ongoing five per cent per annum current account deficit.
In the UK, there are also the related issues that, for most people, real incomes have scarcely risen for nearly a decade, and that recovering consumption is again being financed by borrowing. What appears to have happened is that employers have hung on to employees over the recession, partly because of the costs of making people redundant and, partly, in the hope of economic recovery. As a result productivity has fallen by some eight per cent over the last six years; and, inevitably, real pay has also reduced. This is, arguably, a better outcome than having far larger numbers unemployed, but it raises political problems and also encourages continuing, if not increasing, debt financed consumption, as the recent unexpected jump in credit card debt illustrates.
The challenge is as to how UK investment and exports can be increased on a sustained basis. Part of the answer here is a competitive exchange rate. Sterling’s depreciation since 2008, combined with little or no increase in pay rates, are already resulting in some industries – including textiles – again becoming competitive in the UK. There are major EU membership issues as to whether the UK can make itself competitive enough in terms of cutting back unnecessary regulation; and whether UK exports to the Commonwealth (now a larger block in terms of GDP than the EU) can be increased – where there is considerable scope – while we are subject to EU protectionist tariff rules. In a related territory, moreover, the UK’s misguided green Energy policies, following EU directives more diligently than any other EU members, will damage what is left of the UK manufacturing industry, as green levies are causing uncompetitive increases in energy costs.
If we are not going to end up with another major debt crisis, the post-2010 Government will need to take major and radical decisions and actions to get the balance of the UK economy right. What is depressing – and as I warned back in 2007 – is that the scope for consumption to grow will remain limited for several years to come. It is also arguable that fiscal incentives are needed to encourage investment and more exporting, which may not be possible under EU rules.