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The Chancellor yesterday gave us a budget of tinkering, rather than vision. It is likely to be entirely ineffectual in changing the course of the British economy – according to accompanying documents from the independent Office of Budget Responsibility (OBR)
It may convince the bond-buyers that Britain will stay the course of deficit reduction, but there is nothing to convince the buyers of sterling or – perhaps more accurately – to persuade the sellers of sterling to desist.
Perhaps the most devastating chart in the OBR budget documents is the on UK exports market share which shows continual decline since 1997 and further falls expected through to 2018.
The fundamental strategy since the massive devaluation from 2007 – currently around 25 per cent – has been to rebalance the economy towards foreign trade. The failure to achieve that goal is the main source of continuous disappointments on growth. The devaluation gave a short-lived boost to our share of our export markets, but our performance since has continued on its downward trajectory – and the OBR expects this to continue.
The principal contribution of Europe to this budget is to act a convenient scapegoat for our own political and economic failures. Certainly it is true that Europe remains in recession and the 42 per cent of our exports that go there have suffered accordingly. With Cyprus dominating the headlines, it is an easy scapegoat which plays on British public angst about Europe, and neatly diverts attention from the underlying policy actions now taking place on the Continent: the root tackling of lost competitiveness.
We are currently in the third round of the European Semester process where eurozone countries – but not the UK – are sanctioned if they do not reform their economies. These actions to boost competitiveness on the Continent may take some while just as did Mrs Thatcher's reforms to the UK economy of the early 80's. But the evidence is already accumulating that the big players are having some success (with eurozone countries now trading at a current account surplus of 2 per cent GDP and the UK on a deficit of 3 per cent: source European Commission Winter Forecast). If the destination for 42 per cent of our exports continues to increase its competitiveness, what could happen to our share of their market? How will they perform against us in the rest of the world? Where is there even a discussion of these challenges, let alone a solution?
The budget lays bare the relative weakness of the UK economy versus mainland Europe: a budget deficit that is close to three times the euro area average this year, higher inflation and a balance of payments that is expected to remain in significant deficit throughout the forecast period. That is why there is absolutely no room for complacency in our public finances as we must continue to attract foreign capital.
But here is our big political dilemma: how to reverse our loss of market share in our biggest market while lambasting every failure there, and arguing that we could be better off to leave it anyway. Instead we should be treating it as our salvation and launching an export drive to and through the EU bloc – currently in trade talks with India, Japan and the US – if the Chancellor is to meet his 2012 budget aspiration of increasing the UK exports to £1 trillion by the end of the decade. Although the Chancellor noted completion of the EU trade talks as a key UK foreign policy goal, the political answer to our longer-term economic problems was missing amidst the tinkering and European scapegoating.
