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06 January 2015

Spot the difference between Brown and Osborne: Rivers of national tears to flow abroad

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A classic `time to bury bad news’: just ahead of the Christmas holidays. Suddenly, there it was: the biggest deficit in the UK became the current account of the balance of payments at £100 billion.

 It is even bigger than the budget deficit! But who in the UK has a clue about what the “current account deficit” is, and does anyone even care? Certainly not the Prime Minster or Chancellor.

However, in his February 2010 Mais lecture, George Osborne recognised very fully the role of markets in forcing dramatic economic change. But he seemed to have focussed only on the markets for government bonds, and overlooked the foreign exchange markets as an agent of change.  That may happen once they eventually focus on the frightening trend deterioration in the current account.

Spot the difference between Brown and Osborne

Just before Christmas, some journalists were writing about “record current account deficits” but this phrase does not give any real flavour of the scale of what has happened. The ONS “Pink Book 2014: Current Account” supplies a suitably graphic image – particularly when the scale is extended to cope with the potential 2014 deficit of £100 billion/6% of GDP. For analytical purposes the chart can be split easily into the `Brown years’ (1997-2009) and the `Osborne years’ (2010-2013 in the chart, 2014 now over and with 2015 to come).

However, the bottom line for the UK is that, because of these two periods, generations to come will have to pay interest (or account for profits) to the foreigner on about 50% of GDP/over £700 billion. 

Rivers of national tears to flow abroad

Rather surprisingly, the UK’s deficit in trade and services has improved somewhat in the last two years – with the monthly deficit reducing to about £2 billion from around £4 billion in early 2013. However, comes despite the rise in sterling and thus fall in UK competitiveness. Nor has the UK’s faster growth than its export markets shown any particular influence. Why these factors have not had their traditional, adverse impact is an interesting question indeed. Maybe the lag is longer than normal?

On present form, the UK’s current account will remain easily the largest deficit in the European Union, and be unrivalled amongst industrial countries. Perhaps the forecasters will be dramatically wrong again – by being too pessimistic. However, the deadweight of obligations to the foreigner from the `50% of GDP’ deficits accumulated in the combined Brown-Osborne years are onerous. Perhaps the balance of payments statistics focus too much on `accrual accounting’ rather than the actual cash flows through the foreign exchange markets, but the trend is frightening. Rivers of national tears will have to flow abroad to meet these bills.

© Graham Bishop

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