There isn’t much that everyone agrees on about the British economy. Should we be tackling the deficit right away, or should we try and spend our way out of recession? Should we be slashing taxes to encourage entrepreneurs, or trying to raise more to improve public services? Should the Bank of England be printing more money, or should it finally raise interest rates to encourage savers?
You have more chance of getting the Socialist Workers Party to agree that Mrs Thatcher was Britain’s greatest post-war prime minister than getting a consensus on any of those issues. But there is one thing that everyone seems to agree on: the need to rebalance the British economy.
In the wake of the financial crash of 2008, and in the long period of near-zero growth that has followed it, a common view has emerged. We focused too much on financial services and let the bankers run out of control. Retail was too prominent, and so was frothy property speculation. We didn’t do enough to broaden our industrial base, or to build up our export industries.
Across vast swathes of the north and Wales we allowed the state to become the dominant employer when people should have been making things in factories. What we need is less financial engineering and more of the real sort. There is a problem, however.
Getting on for five years after the crash, there is little sign of this happening. If anything, our economy is even more skewed towards services. Perhaps we should give up on ‘rebalancing’ – and concentrate on things we are good at instead.
In the wake of the crash, official policy seemed to be to let the pound devalue. It might not have been engineered deliberately – investors started selling off sterling because our financial sector was both huge and bust. But once it started the Bank of England encouraged it all the way. Unofficially, at least, the Bank has trumpeted the devaluation as part of a rebalancing strategy.
According to the textbooks, if a currency gets a lot cheaper, a country should be able to start exporting its way out of trouble. Couple that with lots of cheap finance – and the Bank has been making lots of that available – and we should have seen factories springing up all over the country by now. The docks of Bristol and Liverpool and Dover ought to be thronging with British goods being exported to the rest of the world.
It hasn’t happened. Despite that huge devaluation and a tidal wave of cheap credit, the trade deficit just gets bigger and bigger. Last week, we learned that in the first three months of the year, Britain ran a trade deficit of £26bn. That was £1.6bn more than a year ago. The deficit just keeps getting wider year on year.
You hear a lot about how the recession in the eurozone has made life tougher for exporters. And while it is true that it’s unfortunate when your biggest market starts shrinking, that is far from the whole story. Our exports to America have fallen almost as much as our exports to the eurozone over the past year, and the American economy is growing at a reasonable rate.
Germany faces exactly the same problems with the eurozone as we do, but its manufactured exports still managed to grow by 1.7% in the last 12 months, while ours fell by 2.4%. Spain and Portugal have both managed to reduce their trade deficits in the past year by increasing their exports too.
The reality is that, aside from a few car factories in the northeast, some Scotch distilleries, and some arms manufacturers, Britain isn’t much good at manufacturing anymore. We rank 11th in the world among goods exporters, but are the world’s second-largest exporter of services.
We are making virtually no progress in the booming emerging markets. Take India – a massive, fast-growing economy, with which we have strong historical and cultural ties. We rank only 19th among nations exporting there, with 1.5% of the market. Even Belgium exports more to India than we do. It’s a joke.
No doubt we will hear a lot in the next couple of years about how we should try harder. We’ll be told that we should teach more science and engineering at school, that we should provide bigger tax breaks for research and development, encourage apprenticeships and even use government money to invest directly in manufacturing as we did in the 1970s. But maybe we should do something radically different and forget about ‘rebalancing the economy’.
After all, like everything in life, it comes with costs attached. The main tool has been that massive devaluation of sterling. But a cheap pound makes everything we import more expensive, pushes up inflation, and makes life harder for all the other sectors of the economy. The second tool has been cheap credit. But near-zero interest rates punish savers and distort the capital markets.
If our exports were booming, and new factories were being thrown up alongside every motorway, then the costs might seem worthwhile. The trouble is, so far, the attempts to rebalance Britain have involved a lot of pain for no discernible gain. We’d be better off concentrating purely on high-end services instead – we are, at least, world-class at those.
And as a general rule, countries do best by concentrating on the things they do well, and forgetting about the things they do badly – even if it does mean the economy is ‘unbalanced’.