Steel shrivels while Britain’s balance of payments crisis grows

A record balance of payments deficit of £96.2bn (5.2% of GDP) for 2015, and £32.7bn (7% of GDP) for the fourth quarter alone – both higher in percentage terms than in any year since the second world war – and the first, instinctive reaction of the government is to let what is left of our steel industry go hang, so that imports can be boosted even further.


These latest figures are horrifying in both cash terms and as a percentage of GDP. During the war, when this country was, economically, on its uppers, the balance of payments deficit reached some 10%, financed by the Lend Lease arrangements with Washington and by running down our overseas assets.


Every schoolchild should know what happened after that: years of austerity, because our war-oriented productive capacity had slowly to be adapted to peacetime conditions and the expectations of the public for a recovery and improvement in living standards. This involved a succession of export drives so that we could, once again, “pay our way” in the world.


It was Ed Balls, much maligned at the time but now increasingly highly regarded, who pointed out that the 2008-09 financial crisis had economic effects that were the peacetime equivalent of war. But, unlike the situation in 1945, we did not have a war-ravaged economy. We had an economy that had been plunged into recession by a banking crisis. As Balls argued in his seminal Bloomberg speech of August 2010, the last thing we needed, after the economy had begun to recover in response to the fiscal stimulus of 2009, was a policy of austerity. We needed to foster economic growth, and adopt policies that would alleviate a burgeoning balance of payments problem.




The crunch has now come with the impact austerity has had on business investment and the export sector




When the Conservatives resumed what they regarded as their ancestral right – the keys to Nos 10 and 11 Downing Street – people like George Osborne would say that “you can’t spend your way out of a recession”. They would quote James Callaghan, who, in order to please the US administration and the IMF, said something similar when seeking an IMF loan in 1976. But Callaghan subsequently retracted that assertion in his memoirs, and was strongly critical of the deflationary monetarist policies of the early 1980s.


When Cameron and Osborne arrived in office, they were obsessed with the wrong deficit. “Paying our way in the world” has precious little to do with the balance between public and private sector spending and everything to do with the balance of our overseas trade and payments.


The parallel made by Balls with the impact of war should have alerted policymakers to the fact that it took decades for European nations to recover from the war. There was no need for the UK and others to rush to bring down their budget deficits after 2009. As it happens, many commentators are making great play with the fact that Osborne, while inflicting untold misery on vulnerable citizens with his mean-minded cuts, keeps missing those self-inflicted targets anyway.


The crunch has now come with the impact the policy of austerity has had on business investment and the export sector, and hence on the balance of payments. Now, I am not saying for one moment that the blame for what is now manifestly a balance of payments crisis lies solely at the chancellor’s door. The problems have been piling up ever since the Thatcher government’s monetarist experiment with a sensationally overvalued exchange rate that inflicted serious damage on manufacturing.


The damaging effects of an overvalued exchange rate continued, intermittently, under successive Conservative and Labour governments. Back in November 2002 Mervyn King said, at an Inflation Report press conference: “What we’ve seen is a weak net trade sector, offsetting a strong sector producing to meet domestic demand. I think in large part it is the consequence of a sharp rise in the real exchange rate, and what flowed from that.”


But this government’s obsession with the wrong deficit has exacerbated a long-term problem, and brought things to a head. And the very idea of allowing such a strategic industry as steel to go down – quite apart from the social implications in south Wales – beggars belief.


Here we come to some interesting parallels with the circumstances surrounding the June 1975 referendum. Then, as now, there was nervousness in the foreign exchange market as R-Day approached. But then it was less to do with the possibility of exit (“Brexit” had yet to be coined) as with a rise in inflation of 3.9% in one month, bringing the year-on-year figure to 21.7%. These days the monetary policy committee struggles to meet an inflation target of 2% for the whole year.


Then, as now, there was growing concern about the balance of payments and the pound. Then came the 1976 IMF crisis, and an attempt to stem a fall in the pound that had first, in the words of Sir Douglas Wass, Treasury permanent secretary at the time, “declined to fall” and then fallen too much.


The paradox now is that, patently absurd though the whole idea of Brexit is, fears about it have been unsettling the pound. Now we have the balance of payments crisis. I did not get where I am today forecasting exchange rates, but it is not inconceivable that circumstances are combining to bring the pound down to a more competitive level, and that, as in 1975-76, things could get completely out of hand.