The UK finance minister, or Chancellor of the Exchequer, George Osborne, warned in a speech this week that the UK economy faced a ‘cocktail’ of risks this year from developments abroad. Weak commodity prices, sluggish or slowing growth, particularly in emerging economies, mediocre performance in the Eurozone, turbulence in financial markets and interest rate rise in the US could all have an impact.
Talk about getting your excuses in early! Once again, Osborne has proved that he is a canny and cunning political operator. Growth in the UK is forecast to slow slightly this year, and he is already trying to set the agenda by blaming this on events beyond his control.
There is certainly truth in this idea. Domestic demand is growing fairly healthily, while foreign demand has been relatively weak, resulting in a near record current account deficit. Weak demand in the Eurozone, and the impact of quantitative easing by the European Central Bank have exerted downward pressure on the euro. The UK’s apparently healthy recovery relative to that in the eurozone and the prospect of interest rates rising here sooner have supported the value of sterling and helped to worsen the UK’s foreign trade performance and current account deficit.
If the Chancellor makes further progress with his austerity plans, the government’s budget deficit will continue to fall over the next five years, producing a small surplus in 2019-20. As I have argued a number of times in this blog, unless the current account deficit falls along with the budget deficit due to improved foreign trade and investment earnings, then in order for growth to be sustained at the current pace, there will need to be an acceleration in private sector debt accumulation, which could over the longer term lead to another recession as it proves unsustainable. This is more of a medium term forecast rather than one for the next couple of years. At the moment it seems unlikely that the current account will improve sufficiently to rebalance the UK economy over the next few years, unless the pound is devalued against the euro, which is probably only sustainable if foreign demand from the Eurozone picks up significantly.
If the current account deficit does not move towards balance, the budget deficit moves towards surplus, and private debt does not grow rapidly once again, then growth will slow over the next few years. This may lead to some mixture of rising unemployment, a slowing of growth in real wages and a continuation in the sluggish productivity growth seen since the recession.
So in some ways, Osborne is right: there are threats emanating from the UK’s relationship with the rest of the world economy. However, it also shows his utter failure to achieve any rebalancing of the UK economy away from finance, housing bubbles and debt-fuelled consumption and towards manufacturing, investment and exports. In one of his early budgets he dubbed this aim the ‘march of the makers’.
This failure is partly due to the strength of the pound and weak foreign demand. It is also partly due to cuts in infrastructure spending and support for public research and development. Capital spending such as this is an easy short term target for public sector cuts when austerity is the priority. But it will prove short-sighted with regards to long term economic performance, particularly in the tradeables sector. Spending in these areas is vital and Osborne’s decisions are to blame.
As ever, Osborne the political operator will blame any deterioration in economic performance this year on events abroad, since it is starting to look less believable that it is all the fault of the last Labour government, which was voted out of office nearly six years ago. But our political leaders should be scrutinized and held to account for their claims. The danger is that more so-called ‘difficult decisions’ will be justified, which simply means that large sections of the population will suffer from policy changes that, overall, continue to damage our economic future.