Viscount Hanworth
Main Page: Viscount Hanworth (Labour - Excepted Hereditary)
Viscount Hanworth (Lab)
My Lords, two weeks ago there was a brief debate at Question Time on the state of our balance of payments. The debate was prompted by my noble friend Lord Haskel, who asked Her Majesty’s Government,
“what steps they are taking to reduce the United Kingdom’s deficit on the balance of payments in overseas trade”.
I am indebted to him for providing this opportunity to pursue the matter further.
In answering the Question, the noble Lord, Lord O’Neill, the Commercial Secretary to the Treasury, asserted that the UK’s current account deficit has been driven by “changes in investment income”. He added, somewhat counterintuitively, that this has been a reflection of,
“Britain’s attractiveness as a destination for investors”.
He explained that,
“the recent deterioration is due to the growing attractiveness of the United Kingdom … in the minds of investors all over the world”.—[Official Report, 25/5/16; cols. 383-84.]
This seemed to defy logic. Therefore, I must attempt to uncover what may have been in his mind and what might also be believed by some of his colleagues.
The country’s international transactions fall into two major categories. On the one hand is the current account, comprising the income from the trade in goods and services and the income from investments; on the other hand is the capital account, which I shall examine in more detail hereafter. There can be a surplus or a deficit on either account but, by the logic of accountancy, this must be met by an equal and opposite deficit or surplus on the other account. My noble friend Lord Haskel was alluding to the fact that today Britain has an unprecedented deficit on the current account. This ought to be a major cause for concern.
Our international creditworthiness cannot survive a prolonged current account deficit and to lose it will have dire consequences. The effect will be similar to that of a run on a bank, albeit on a much larger scale. The money invested by foreigners in the UK will be withdrawn and the value of the pound on the international currency markets will plummet. In an attempt to stem the flight of capital, the Government will be forced to raise interest rates. Growth and investment will cease and there will be a prolonged period of economic misery.
The UK has recorded current account deficits every year since 1994. The latest figures show that the current account deficit was 5.2% of nominal GDP in 2015, which is the largest deficit since the records began in 1948. The deficit is worsening. In the fourth quarter of 2015, it was running at 7% of GDP. Unless this situation is amended, the cumulative total of the deficits will sooner or later pass a threshold or a tipping point, and the miserable consequences will ensue.
The principal cause of our current account deficit has been the failure over many years of our export trade in manufactured goods. Our export of goods has diminished both as a proportion of our foreign trade and in absolute terms. In contrast to the deficit in the trade of manufactured goods, there has been a surplus in the trade in services. This surplus defrays part of the deficit in the trade of goods. However, it is less than the deficit, and its growth has ceased.
There are two more items in the current account. These are the so-called primary income account and the secondary income account. The secondary income account concerns payments to and receipts from international organisations, and other miscellaneous transfers. This is something that for present purposes we can afford to ignore, albeit that the relatively modest transfers to and from the European Union are commanding disproportionate attention at present. The primary income account concerns earnings from investments. Our own earnings from investments overseas must be set against the earnings of foreigners from assets held in the UK. In the past, our net earnings have been positive and, at times, substantial. Now, the account is in deficit. The most significant factor in determining the deficit on the income account is the balance between the value of the overseas assets owned by the UK and the assets that are in foreign ownership. The balance is no longer in favour of the UK. In 2014, the stock of UK liabilities surpassed that of UK assets, for the first time since records began. The deficit on the primary income account is a reflection of this circumstance.
We have sought to defray our current account deficit and to balance our payments by divesting ourselves of the ownership of our capital assets and selling them to foreigners. As the Commercial Secretary, the noble Lord, Lord O’Neill, has remarked, they have been keen to acquire the ownership. He has described our divestment of the ownership of our assets as “foreign direct investment”. This terminology is highly deceptive. In the inverted logic of the Minister, the growth of foreign ownership is the cause of our current account deficit. Of course, he is mistaking an effect for a cause. The true cause of our current account deficit has been our failure to export manufactured goods in sufficient quantities. The effect is that we have to rely on the sales of our capital assets in order to maintain the overall balance of payments.
On a previous occasion, I have described the remarkable extent of the foreign ownership of our assets and how this is prejudicing our economic welfare. We have only a finite supply of companies and properties for sale abroad. Eventually, the supply will be exhausted and the consequences that I have mentioned will ensue. The only way in which to mend the balance of payments is to increase substantially our exports of manufactured goods. For our goods to become saleable abroad, the value of the pound must be reduced. If nothing is done to overcome the balance of payments problems, it is inevitable that the value of the pound will eventually plummet.
I asked the Minister, in the course of the brief Question Time debate, whether he could envisage a more orderly way of reducing the value of the pound. There are many ways of achieving this which our economic competitors have applied to their own currencies. However, the answer from the Minister implied that he did not recognise the significance of the problem with the balance of payments. I wish to emphasise the severity of that problem and to call for action to address it.