George Osborne is right that a recovery based on strong export growth is better than one based on increasing household debt. Unfortunately that's not the recovery we're getting
The Chancellor said in his budget statement today that Britain needs to export more. His belief is that economic security and resilience come from living in a country that earns its way in the world. We have a long way to go before we can make that claim.
For the last three decades we have been living well beyond our means in the global economy. Official figures for the first three quarters of the year show 2013 is set to be the 30th consecutive year in which the UK has recorded a deficit on its current account balance.
These deficits have been financed by selling assets to overseas buyers. As a result, large parts of British industry and infrastructure are now in foreign ownership.
How long can Britain sustain this position? No one really knows. The Chancellor is right, however, to imply that a recovery based on strong export growth and a declining current account deficit is more likely to be sustained than one based on increasing household debt. Unfortunately, that is not the recovery that we are experiencing.
In his March 2012 budget, George Osborne said: ‘We want to double our nation’s exports to one trillion pounds this decade’ (subsequent government statements clarified that this meant by 2020). Exports are a long way off the path needed to hit this target.
Exports in 2011 were £493 million. That meant annual growth of 8.2 per cent was needed between 2011 and 2020 to achieve the £1 trillion target. But the latest figures show exports grew by only 2.2 per cent between 2011 and 2013, when they totalled £504 million. The annual growth rate needed now if exports are to reach £1 trillion by 2020 has increased to 10.3 per cent.
In the decade to 2008, when global demand increased at a rapid pace, UK exports grew at an annual rate of just over 6 per cent. With growth in global demand likely to be slower in coming years, a significant improvement in the UK’s export performance will be needed if the £1 trillion target is to be reached in 2020.
Within the last thirty years, only in the mid-1990s has there been an export-led improvement in the UK’s current account balance – and that was thanks to the 20 per cent devaluation of sterling that followed the pound being ejected from the European exchange rate mechanism. However, despite sterling falling sharply in 2007 and 2008 (and by slightly more than in 1992), the current account deficit has got bigger in recent years.
Even allowing for the crisis in the euro zone, which affected demand in our major export market, the slow growth in UK exports over the last two years is disappointing. It suggests Britain does not have the capacity in the right industries to take advantage of the increased competitiveness that has resulted from the latest fall in sterling.
Improving our export performance, therefore, requires the government to adopt an explicitly pro-export industrial strategy. Sadly, the budget fell short of delivering such a strategy. The measures that the Chancellor did announce – principally a big increase in export credit – are welcome, but they are unlikely to be sufficient to lift export growth to more than 10 per cent a year between now and the end of the decade.
Tony Dolphin is chief economist at the Institute for Public Policy Research
