What Cameron failed to say in his speech

The party conference season is over for another year. While it was uninspiring mid-term fare for the most part, I offer some observations. Thanks to Labour’s Manchester set-piece, we now know that party leader Ed Miliband wants to steal Disraeli’s “one nation” mantle. We learnt in Brighton that maybe, possibly, the Liberal Democrat’s Nick Clegg won’t back the Conservatives’ plans to find another £10bn of welfare savings, but he definitely wants to increase taxes on the rich.

In Birmingham, we were reminded of Boris Johnson’s oratorical skills and the affection he generates among his own party faithful. But it was also apparent that much of the Tory rank-and-file still see “Bozza” (for now at least) as an amusing rabble-rouser, rather than a future party leader.

Then there was the UK Independence Party conference, also in Birmingham. This made clear that UKIP are a lot more than a single-issue pressure group railing against Britain’s European Union membership. Increasingly confident, Nigel Farage’s party now seems unlikely to agree to any kind of electoral pact with the Tories, certainly not nationally and probably not seat-by-seat either.

Amidst the headlines on inter- and intra-party struggles, though, I feel I should praise a little-noticed section of the David Cameron’s conference speech, which I believe to be of economic significance. I also feel I should chide the Prime Minister for something he once again failed to say.

Cameron, to his credit, eloquently highlighted that this country is in a “global race” with economies like India, China and the other rising powers of the East. As an emerging markets specialist, I’ve often badgered senior UK lawmakers about their lack of understanding at just how fast the centre of world economic gravity is shifting, and Britain’s wholly inadequate response.

Most Western politicians, just like the vast majority of Western investors, talk the talk on emerging markets, but very few tailor their policies or capital allocations to the new reality. In Cameron’s speech, though, I detected the germ of a genuine understanding that the future is now. While it’s easy to conjure with words, the Tory leader showed an admirable awareness, so often denied by our political classes, that we’re living through a massive economic reconfiguration, with the East rising and the West in decline.

The emerging economies are “lean, fit and obsessed with enterprise”, remarked the Tory leader, while countries such as the UK are “fat, sclerotic, over-regulated, spending money on unaffordable welfare systems”. I couldn’t have put it better myself. “We’ve been hearing about China and India for years, but it’s hard to believe what’s happening in Brazil, in Indonesia, in Nigeria too,” observed Cameron. “And, meanwhile the old powers are on the slide”. Amen to all of that.

The latest World Economic Outlook, published by the International Monetary Fund last week, underlined just how fast the global economic landscape is changing. Just over a decade ago, America’s GDP per head was 37 times greater than that of China. Next year, says the IMF, that ratio will be just 8 times. Over the same period, the income of the average Russian will rise from one twentieth of the average American to one third. Words such as “incredible” and “unprecedented” don’t adequately describe such changes which are happening, lest we forget, over little more than a decade. The economic powerhouses of yesteryear, as Cameron said, need to react to this new reality by significantly raising their game.

Yes, the emerging markets have lately been impacted by the Western slump. This year, for the first time since the turn of the century, the Chinese economy, now the world’s second-largest, may grow by less than 8pc. But the IMF still predicts a buoyant 7.8pc expansion, rising to 8.2pc in 2013.

Brazil, now the world’s 6th-largest economy, could grow by 2pc this year, says the Fund, down from 7.5pc in 2010, not least due to its links with a still sluggish US economy. But the IMF foresees a come-back to 4pc growth in 2013, with the Brazilian economy being boosted by preparations for the 2014 World Cup and 2016 Olympics.

India has problems, of course, which is hardly surprising in a country of over 1bn people. But it’s now the 10th biggest economy on earth and the 3rd or 4th biggest on what economists call a Purchasing Power Parity basis. Indian growth may fall to just 4.9pc this year, says the IMF, before recovering to 6pc next year. These are growth rates that Western countries can only dream of.

The signs of a shifting balance of economic power are legion for those willing to see them. Just in the last week, China’s Lenovo knocked Hewlett-Packard off top-spot to become the world’s biggest maker of personal computers. Russia’s Sberbank, meanwhile, is now Europe’s biggest and most profitable retail bank.

The Eastern powers have become the engine room of the world economy, accounting for the lion’s share of global growth. Far from building on our historic advantages to boost our commercial engagement in such nations, I’ve watched with my own eyes how Britain’s involvement has waned in recent years, as our diplomats have become more insular and less commercial, much to the delight of more broad-minded Western competitors. If we are to remain in the economic premier league, this simply must be put right – and Cameron’s words, I hope, represent a start.

The IMF also noted last week that “the resilience of emerging markets and developing economies – measured by their ability to sustain economic expansions and recover quickly from downturns – has increased markedly”. In other words, the Eastern powers are far less indebted than their Western counterparts, with sovereign liabilities averaging under 40pc of GDP, compared to more than 120pc among the G7 group of “developed” nations.

While the “new new world” has state debts that are low and getting lower, the West is getting ever more in hoc. This applies even in countries, such as our own, which are following “austerity” policies. This brings me to the part of Cameron’s speech which should have been there, but wasn’t.

The Prime Minister’s conference turn was a missed opportunity to re-assert, beyond “quantitative easing” and our artificially and temporarily low gilt yields, the extent of the fiscal challenge still confronting the UK. Lost in the willful manner in which our politicians confuse “deficits” and debts” is the horrific truth that, even if Tories fulfill their budget retrenchment plans – a big if – our national debt, upon which we must consistently pay interest, will continue to balloon.

UK net public debt, which was £581bn in 2008, is set to soar to more than £1,500bn on the Treasury’s number by 2015/16. Why have I never heard a senior Tory publicly say this? Why do the cabinet, including the Prime Minister, continually talk about “paying off the deficit”? This is a conceptual nonsense. You don’t “pay-off” the deficit. The deficit is merely the annual increase in our national debt. Once the deficit hits zero, your stock of debt has peaked – unless, of course, you slip back into deficit the following year.

Even under “austerity”, our program of retrenchment is so feeble, so strong on rhetoric and weak on action, that UK government debt is set to triple is less than a decade. At a time when the Labour front bench is gaining traction with the tosh it spouts about “putting the money back in” and “borrowing more to borrow less”, why is the Prime Minister not making this ghastly reality crystal clear?


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