George Osborne has missed his chance to end the British disease
Chancellor's claim that Britain 'inspires confidence around the world because it seeks to live within its means' is a corker
By Ambrose Evans-Pritchard, International Business Editor
8:33PM GMT 03 Dec 2014
This is prima facie evidence that we are not in fact living within our means. The money is not being spent on imports of machinery to drive future manufacturing growth or on technology to raise our economic speed limit. We are importing global capital at a rate of 5pc of GDP to cover incurable shopping habits.
We used to get away with it because of high earnings on overseas investments but we are now in a low-yield world. Besides, our net international liabilities are creeping up each year. There is no free lunch.
On the fiscal front, Britain has a deficit of 5pc of GDP a full five years into the economic recovery, when growth is running at 3pc and should be generating a windfall of tax revenue.
This is prima facie evidence of a chronic reliance on state borrowing to perpetuate a consumption model.
The deficit is 4.4pc in France, 1.5pc in Italy and 0.2pc in Germany. The US deficit - once similar to ours - has dropped to 2.8pc of GDP on a quarterly basis. Britain sticks out like a sore thumb.
Mr Osborne told us that “warning lights are flashing over the global economy, and geopolitical risks are rising”. If so, it is remarkable that he can so boldly predict a balanced budget by 2018, and a surplus of £23bn – no less – by the end of the decade.
Should we go into a fresh global downturn with a fiscal deficit already so high, borrowing will spike to 10pc of GDP in short order. That is the harsh reality.
This is not to say that spending should be slashed overnight. Fiscal tightening must be administered at the right therapeutic dose. The eurozone debacle has shown that austerity for the sake of it makes matters worse, causing debt ratios to rise faster. The British state can borrow for 10 years at an interest rate of 1.9pc. It should do so without compunction, but only for the right purpose.
The question that the Chancellor must answer as this Parliament draws to a close is whether his deficit - for it is his now - is being spent on infrastructure projects that boost our economic growth over the long-term, or whether it is propping up the old credit-driven model that he vowed to reform.
The OBR has forecast that household debt will rise from 146pc of income to 180pc by 2019. They might as well tweet that this country has learned absolutely nothing. If this is right, Mr Osborne has wasted his chance to end the British disease.
“I don’t see that anything is being done to improve the competitiveness gap,” said Jean-Michel Six, chief Europe economist at Standard & Poor’s. Britain’s output per hour is 21 percentage points below the G7 average, the widest productivity gap since the early 1990s.
It is true that Britain has created 500,000 jobs over the past year - as much as the rest of the EU combined – and this makes the productivity figures look worse than they are. It is certainly a better outcome than the labour “hysteresis” of rotting skills caused by mass unemployment in southern Europe.
This government has presided over the creation of 2m new jobs in the private sector. The handover from Gordon Brown’s Leviathan to a leaner state is occurring. “Total managed expenditure” has dropped from 45.5pc to 43pc of GDP since the crisis, and will in theory be the lowest since the Second World War within four years. Let us never forget that Mr Osborne inherited the fiscal legacy from Hell.
It is also true that the UK has jumped to second spot behind Switzerland on the Global Innovation Index, as the Chancellor told the House.
Yet you could equally ask why the UK ranks 45 on the World Bank’s “Doing Business” index for starting a new enterprise, or 68 to register a property, or 70 to obtain electricity – with a delay of 126 days compared with an OECD-average of 77 – or why it takes 437 days and costs twice the OECD-level to enforce a contract.
The World Economic Forum says Britain ranks 37 for the burden of government regulation, and 63 for the quality of maths and science education. These are deep failings. The Coalition has not done much about them.
Nor has there been much sustained effort to switch the tax and incentive structure of the British economy from self-indulgence to production, or to change the fundamental way we organize our economic affairs as a nation. To do so would ruffle feathers. There lies the rub.
For all the superficial likeness, the Anglo-Saxon growth stories in Britain and America have nothing in common. The US has cut its current account deficit from 6pc to 1.9pc of GDP. It is on track to achieve energy independence by 2018, igniting a revival of its chemical, plastics, glass and steel industries along the way. Luck has played its part but one recovery is durable, the other is literally on borrowed time.
The Chancellor told us he would “stay the course”. A change of course might be preferred.