George Osborne is just back from a five-day trip to China. The chancellor shook hundreds of hands and travelled thousands of miles to encouraging deeper trade links between the UK and the People’s Republic. As such, he now stands accused of kowtowing to the Chinese. I’d say such criticism is nonsense.
I’m no Osborne cheerleader. This column often highlights, for instance, the gulf between the Treasury’s “austerity” rhetoric and what’s actually happening to our public finances. While the annual budget deficit has fallen from the mind-blowing 11.4pc of GDP the Chancellor inherited in 2010, it remains huge at 5.7pc of national income – higher than when the UK went cap-in-hand to the International Monetary Fund in 1976.
Having run a series of large deficits, averaging over £100bn annually since he took office, Osborne has overseen a ballooning of the UK’s national debt, from £960bn to £1,652bn – almost 90pc of GDP. The government now spends far more on debt interest each year than on defence – and, as interest rates go up, such debt service costs can only increase.
And, still, state borrowing is still rising. The government spent £12.1bn more than it raised in August, we learnt last week, with borrowing £1.4bn higher than the same month in 2014. That’s despite the UK economy now growing at a buoyant 3pc a year, and having expanded for 10 successive quarters, the third-longest growth spurt since the mid-1950s. If the annual deficit does end up falling when the fiscal year ends next April, as the Treasury insists will happen, it won’t be by much. We’re on course for at least an £80bn shortfall in 2015/16 – adding mightily, once again, to the UK’s public debt millstone.
Some say that by conveying the impression of “austerity”, while running a massively expansionary fiscal policy anyway, Osborne has pulled off a political masterstroke. I’d say that, in the real world, the UK’s public finances remain extremely fragile – and, once traders lose patience with our rigged sovereign bond market, Britain’s inherent fiscal weakness could explode in the government’s face.
Freed of their coalition partners, and with Labour in disarray, the Conservatives should be taking decisive action to get our public finances quickly into surplus, breaking the reprehensible habit of shoving ever more debt onto our children and grandchildren. It seems, though, that politicians in the UK, indeed across the entire Western world, lack the required determination and leadership. It’s always easier to “extend and pretend” – except that doing so now involves not just racking up endless annual deficits, but relying on bond yields that have been fundamentally warped by printed money. And no-one knows what will happen once rates go up and such “extraordinary monetary measures” are unwound.
Having said all that, I do think Osborne was right spend last week in China, enduring the inevitable brickbats about ignoring human rights abuses (he didn’t) and posturing as a future Prime Minister (what do you expect?) For the reality is that, despite our trading heritage, and cultural and historic ties spanning the globe, Britain’s external sector is woefully under-performing. For years, the Tories have pledged to “rebalance the economy” away consumption towards exports. “We’re competing in a global race”, David Cameron observed back in October 2012.
Yet despite a 15-20pc fall in the trade-weighted value of sterling since the 2007 credit crunch, our external position has deteriorated badly. The UK’s service sector trade surpluses – partially reliant on financial services, of course – are consistently out-weighted by much bigger shortfalls in tangible goods. The UK has run an overall external deficit for 29 years in a row – with trade acting as a drag on British growth for a generation. Last year’s deficit, at 5.5pc of GDP, was the highest on record. So it’s imperative we export more – not least to fast-growing Asian markets such as China.
While the gloss has lately come off China’s growth-story, this remains a country that has expanded at an average of 10pc a year since the mid-1980s. Other Asian tigers, like South Korea, Taiwan and Malaysia, have grown by 6pc a year or more. Yes, the Chinese stock market just took a high-profile dive – providing the Federal Reserve and others with a convenient excuse for further delaying that nerve-shredding first interest rate rise. But there is no scenario under which China, easily the world’s most populous country and already the biggest economy adjusting for living standards, doesn’t become even more important over the next ten to twenty years. Plus shares remain 40pc up on a year ago.
As wealth and sophistication spreads across Asia, demand is spiraling for everything from machine tools to luxury goods. The growth of the new Asian middle class remains the biggest demographic trend since Western Europe’s industrial revolution – and the UK is missing out. British exports to China have risen, from £4bn in 2004 to £16.7bn last year, but our imports remain much larger, up from £11.4bn to £37.6bn. So, far from tapping into China’s growth, our trade with the country is swelling our external deficit.
While the UK sends 3.4pc of its exports to China, amounting to £10.2bn last year, Germany sends 6pc of a far larger total – no less than £52bn. For all the talk of the UK “competing in global race”, only 5.6pc of our goods exports went to “emerging and developing Asia” last year, according to the IMF, with more UK goods being sold in Belgium than in mainland China and India combined.
Last year, the combined GDP of the emerging markets surpassed that of the “advanced nations” for the first time in five centuries. Yet the Bric economies (Brazil, Russia, India and China) together accounted for less than 7pc of all UK exports – which is painfully low. These countries between them, together with other large emerging markets such as Indonesia, already account not only for the majority of the global economy, but also the overwhelming share of global growth. While obviously subject to downswings, the West-to-East direction of travel is clear. History doesn’t happen in straight lines.
It is vital UK firms are encouraged and assisted in their efforts to win market share across Asia and the other emerging economies. While multi-nationals can largely look after themselves, our Eastern export drive should be centred on innovative, job-generating British small and medium-sized enterprises. There is much we can learn from Australia – where local and national government has long run state-funded SME-focused “super-trade missions” to Asia, generating a lot of export activity off the back of very little government spending.
It makes sense, in my view, for Osborne to encourage Chinese firms to bid for a share of large infrastructure projects in the UK – including high-speed rail. China, after all, now boasts a 10,000 mile high-speed rail network, more than the rest of the world combined. I remain queasy about the proposed £2bn government guarantee under which China will invest in the Hinkley Point nuclear power plant. But my concerns are more about the extent to which atomic energy seems to require countless billions of public subsidy, rather than that the purported deal might involve China.
Globe trade has just recorded its biggest contraction since the 2007 financial crisis. The world, including the UK, needs to trade more. There are few certainties in economics, but one is that international trade promotes prosperity, mutual understanding and peace. George Osborne, as he showed last week, is one of the few senior British politicians who really gets that – and I applaud him for it.