Britain can restore economic prosperity by rediscovering its love of bankers.by Anatole Kaletsky / January 22, 2015 / Leave a comment
Nice economy, shame about the politics. This seems a fair summary of the conventional wisdom on the state of Britain as it heads towards the general election. But is the economic outlook really that much better than the political mess which almost everyone expects to be disgorged by the ballot boxes on 7th May?
The widespread impression that Britain’s economy has recently enjoyed some kind of renaissance and has done significantly better than the rest of Europe since the global financial crisis, is simply not true. The problem is not just that strong job growth has been secured at the cost of the biggest decline in wages since the 19th century, or that public services have been sacrificed for budgetary rigour, or that exports have suffered from endless euro crises. All this is true, but Britain’s economic malaise is deeper and implies a major new risk after the election: a vicious circle of economic underperformance interacting with political instability, especially if a Labour-led government emerges in May. The risk of triggering a vicious circle between politics and financial markets may explain why Labour has failed to point out that the five years of coalition austerity has not just been socially painful but economically counter-productive.
The structural flaws that even Ed Miliband prefers not to mention can be summed up in two numbers. The first is the current account deficit, the difference between Britain’s international income and spending. The current account is the truest measure of dependence on foreign capital and the extent to which the country is “living beyond its means.” The second critical statistic is Gross Domestic Product per head, the best gauge of material living standards and productivity across the whole economy.
Britain’s 2014 current account deficit is estimated by the International Monetary Fund as being $120bn, or 4.2 per cent of GDP. This was easily the biggest deficit outside the United States in dollar terms and the biggest relative to GDP among all the economies of the Organisation for Economic Cooperation and Development group of countries. It was three times larger than the next biggest deficit in Europe, the $41bn or 1.4 per cent of GDP recorded by France. A related statistic, the inflow of short-term foreign capital unconnected with…