George Osborne has spent the best part of a decade telling everyone else that we need to live within our means. By which, of course, he means that ordinary people are going to have to pay more in taxes and get less back in public services and benefits in order to reduce the “fiscal deficit” – the gap between government spending and government income.
There is, however, another deficit that Osborne would really like you not to look at. It is called the “current account deficit”, and it stands at £92bn. The current account is what used to be called the balance of trade. It is a measure of how much the UK makes from its dealings abroad, and how much people from abroad make out of the UK. Ideally every country in the world’s current accounts should be in balance. In practice, this never happens. And so long as countries’ deficits do not get too big; and so long as lenders continue to believe that the country will be able to pay it back, a current account deficit is not a problem.
In the UK, the headline £92bn deficit is a problem on two grounds according to Larry Elliot in the Guardian. First, it is a deteriorating trend:
“Forget Tony Barber. Forget Nigel Lawson. No chancellor since modern records began in 1948 has presided over as big a shortfall on the nation’s current account as George Osborne in 2015.”
Second, it obscures a dangerously unbalanced economy:
“The reason the economy is seriously unbalanced is that Britain has the wrong sort of growth – too dependent on consumer spending (hence the whopping deficit in goods) and on the services sector (hence the healthy surplus in services).”
Most alarmingly, the UK has a trade in goods deficit of £125bn which is only offset by a surplus of £89bn in services. You have to go back to the early 1980s to find the last time Britain exported more manufactured goods than it imported.
Britain also has a £35bn deficit on investments – the difference between the money that comes into the UK from investments abroad, and the money that leaves the UK to those with investments here.
Whereas Osborne could cancel the fiscal deficit overnight by the simply expedient of printing money and using it to write off corporate and household debt, no such luxury exists with the current account. As Elliot points out:
“The reason the economy is highly vulnerable is that there is a cost to running big current account deficits. Foreign investors have to be willing to allow Britain to live beyond its means. Thus far they have been prepared to do so but they could pull the plug at any time.”
It is in this light that we should view Osborne’s decision to sell state assets to foreign investors, together with his failure to find the money to protect strategic infrastructure such as energy generation and steel making… but by the time those chickens come home to roost, someone else will be in 11 Downing Street, while Osborne (like his predecessor) will be enjoying a nice new job in one or other of the large banks.