How is the UK going to pay for all those imports?

 

Under both recent governments the UK has got used to buying many more imported goods than we export. Years ago when we did this, we sold more services abroad and enjoyed a surplus of earnings on investments from overseas, which gave us sufficient foreign currency to pay for the goods.

Now we still generate a surplus from services, but no longer enjoy the same big net income from investments overseas compared to foreign interests taking loan interest and dividends out of the UK based on their investments here. All those years of boasting about how much foreign investment we have attracted into the UK takes its toll on the national income and wealth figures. Every time a foreigner buys an existing company or puts in a new factory of his own, he  gains the right to take money out of the UK as those assets earn him income. There are now bigger foreign incomes on  assets  in the UK than we earn from  holdings of wealth elsewhere.

If we cannot export enough goods and services to pay for all the imports, and if we no longer have enough interest and dividends coming in from our overseas holdings to offset all the interest and dividends now going out, we need to find another way to pay the bills. We have to either sell some assets to foreigners, or borrow money from abroad to keep hold of the assets we have. It amounts to the same thing in the end. If the UK does not sort out its balance of payments deficit, the loans will have to be repaid by selling some underlying assets.

When I wrote here briefly recently that the UK has to sell assets to pay for the imports, I was not recommending it as a policy. I was merely pointing out the obvious. Some seemed shocked. How else do you think we have been managing to import so much more than we can afford out of our regular income? How else do you propose we pay for all the excess imports if we cannot export more?

The Coalition government wants us to export more. That is the best way to afford our imports. We should be keen to export services as well as goods, as they all earn us the foreign currency we need to pay the bills. T0morrow I will look at the way the UK likes to attack the very  businesses that offer us most hope of exporting our way out of this problem.

I have just been reading the excellent Civitas Report on trade and the EU. It shows that under the regime of the single market the UK reaped no benefit by beign inside the so called market. Our exports to the rest of the EU went up much less than those of many countries which stayed outside the arrangement.

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61 Comments

  1. Lifelogic
    Posted May 7, 2014 at 5:27 am | Permalink

    We need to be more competitive if we want to export more. The bloated and incompetent state (which recently approached nearly 50%) makes this very hard indeed to achieve. Idiotic employment regulation, expensive energy by daft religion, the minimum wage, over taxation, inefficient public services, a poor, slow, unclear and expensive legal system, expensive property due to lack of supply, poor banking, high inheritance taxes, capital gains taxes, slow and complex planning systems, the EU, green energy drivel, white elephant, money down the drain, projects like HS2, Vince Cable and Ed Davey types in government…..

    Red Ed Miliband soon to follow socialist Cameron with his idiotic rent act, train nationalisation and the rest of his bonkers plans too. No prospect of sensible government for years to come – not great for business confidence!

    • Lifelogic
      Posted May 7, 2014 at 11:51 am | Permalink

      Might lefty Cameron and Red Ed not learn something from the economic disaster that is France at the moment!

      • Hope
        Posted May 7, 2014 at 4:08 pm | Permalink

        The Tories allow the EU to dominate everything the UK does. Import export trade agreements, the lot. I laughed at a Tory campaign leaflet today. It read that the Tories had taken as much action as it could within EU agreements to cut immigration. This was their actual boast. This about sums it up. The Tories will take as much action as it is allowed by the EU, I think this applies to everything JR. You need a change of leader ASAP. People like me will not vote Tory as long as he is in place and his other liberalist ministers in cabinet. Both Miliband and Cameron are vying to implement the will of the EU. Does not matter which one the public votes for you get the same. Time to vote for a change.

        Grayling equally inept over the criminal justice system allowing serious offenders, including for offences of murder and manslaughter, early release. I presume this is in line with the EU and also the dim- witted right for prisoners to vote! When will life mean life? Truly shocking. How many robberies does skull crusher have to commit before being kept in prison for a long time to protect the public? How much does it cost us?

    • David Price
      Posted May 7, 2014 at 1:00 pm | Permalink

      Just how do you be more competitve when selling to a German company that will only buy from another German company. It doesn’t matter if you have a product, technological or financial advantage you will not make the sale.

      It is nothing to do with your usual catalogue of complaints, it is the consequence of trying to compete on your competitors home turf when they don’t play by your preferred free trade rules.

      We need to play by our competitors rules and those of the markets we operate in not some idealised set of theoretical free trade ideals.

      • alan jutson,
        Posted May 7, 2014 at 2:37 pm | Permalink

        David

        “Our competitors do not play by the same rules……”.

        But there are no real rules, you do not have to purchase any product no matter how low the price if you do not want to.
        It is not all about price and/or performance, you simply buy what you want to buy and pay the price of your choice.

        The USA is good at that game, that is why the US has been a graveyard for so many UK businesses.

        We should be proud to purchase UK goods if they are available and of the right quality, performance and price, but very often they are not, and the more multicultural we become, the less chance of a bit of patriotism which may have helped in times past

        • David Price
          Posted May 8, 2014 at 11:26 am | Permalink

          My exerience of sales activity has been with large technology corporations and there are generally governance rules and shareholder concerns that influence the buying attitude I am refering to.

          In terms of individual choice I agree these are not rules based but it seems we are far less patriotic than most other nations in this.

      • Lifelogic
        Posted May 7, 2014 at 6:50 pm | Permalink

        That may well be a problem too but if you have to carry all the weight of a huge and largely non producing state sector, expensive energy, over regulation, market distortions, idiotic labour laws, dreadful health care, expensive property, poor banks, poor schools and universities and all the rest – it rather pushes your costs up and just pushes you out of the market.

        • David Price
          Posted May 8, 2014 at 6:40 am | Permalink

          Don’t deny reducing some of these burdens wouldn’t be a good thing but you ignore that many of these issues apply to our competitors, and it’s other “local” problems that have really taken their toll over the years.

          The MSM who seem to delight in applying their notions of morality to companies competing in other markets. A nation of shoppers who happily buy imported goods despite the effect on their neighbours employment and eventually their own. Companies who outsource skills for a quick buck developed on the back of years of education, experience and R&D at the cost of numerous jobs and harder competition in the overseas markets. A society that celebrates vacuous celebrity and lauds and rewards the actor who plays the part of a doctor, engineer, scientist or teacher far more than the professionals themselves.

          We have a government who’s only notion of technological advance is a train that goes a bit quicker and an economy that seems to focus solely on people who rent properties out and financial organisations that make money on every transaction. Good luck exporting those.

    • margaret brandreth-j
      Posted May 8, 2014 at 6:43 pm | Permalink

      Rubbish, Siemen’s are doing us a favour and 20% of our electricity by wind power is the beginning of becoming free from reliance on fossil fuel .

  2. margaret brandreth-j
    Posted May 7, 2014 at 5:38 am | Permalink

    As with anything else in the selling game I would imagine that that the three main elements are a competitive price, quality and prestige. If the three are combined then there is a better chance of getting contracts and selling off to the highest and most suitable bidder. Pzifer is a well known company in medicine ,but it takes many years of preparation to sell off a solid business. It doesn’t become solid without the years of input, There are no overnight blue chips.
    With H Wilson the slogan was to ‘ Buy British’.If we build up British then we can sell British as the businesses become more prosperous.

    • Jennifer A
      Posted May 7, 2014 at 11:41 am | Permalink

      So.

      Is Mr Osborne’s recovery real then ? Does he have any more control over things than Mr Cameron does over our control of EU law ?

      Are we really putting anything at risk by voting UKIP ?

      • Hope
        Posted May 7, 2014 at 4:11 pm | Permalink

        Certainly no risk. Vote with your conscience. Could you really believe a word Cameron says?

        • David Price
          Posted May 9, 2014 at 7:24 am | Permalink

          Could you really believe Farage can deliver anything he promises?

          UKIP are at angry at Cameron and the CP in a coalition government because they haven’t delivered much of what they promised nor what you have wanted (not necessarily the same things). But you are setting everyone up for disappointment, building up Farage and UKIP promises on a foundation of unreasonable expectations.

          Will you be as vociferous and critical of UKIP failures as you have been of Cameron and the coalition? Based on the silence from UKIP commenters in the face of embarassing candidates and UKIP financial revalations in recent weeks I guess you will not apply the same standard of judgement.

      • Lifelogic
        Posted May 7, 2014 at 6:54 pm | Permalink

        The recovery seems to be based on attracting the wealthy, from places all around the world – to buy up posh London and pay just the UK tax haven non dom taxes.

        He has been lucky that the problems in the Arab countries, the EU, eastern Europe etc have pushed so many to live near Harrods.

    • margaret brandreth-j
      Posted May 7, 2014 at 1:27 pm | Permalink

      Pfizer; apologies

  3. alan jutson,
    Posted May 7, 2014 at 5:51 am | Permalink

    Yes because the family provider does not have enough work, they need to sell off or pawn the family silver to pay for food.

    The alternative is to borrow, get into debt and pay interest on the loan so you have even less to spend if work continues to be short, so ever more family silver has to be sold or pawned.

    Eventually of course you run out of family silver if things do not turn around.

    So you could grow your own food (takes time to start and requires an initial investment) that would help a bit.
    You could learn a new skill to add to the skills you have, that may get you more chance of additional work.
    You could attempt to spend less and mend things which are broken, rather than throw away and purchase new.
    Other members of the family could take in work to do at home, it may not pay much but may be just enough to make the difference.

    Amazing how running a Country is so similar to a family running a house budget.

    Why is it intelligent people (and most MP’s are) seem to trust economists with all of their clever complicated schemes.

    Why is it that MP’s think they know better than those who EARN the money, that they then take and spend.

    • Edward2
      Posted May 7, 2014 at 4:21 pm | Permalink

      You are of course correct Alan, in all you say, but there is one big difference that Governments can just print their own money.
      Nice if householders could do the same!

      Some (mainly on the left of politics) say why not just keep on spending and printing.
      They tell us that nations cannot go bust.

      • APL
        Posted May 8, 2014 at 7:09 am | Permalink

        Edward2: “one big difference that Governments can just print their own money.”

        And the problem with that is, as the government prints more money; everything else being equal, or worse the economy being stagnant or in a (great) recession, every participant in the economy is made poorer in terms of the currency of the economy.

        That’s why a smallish chocolate bar costs the best part of 15 shillings today, where as thirty years ago a similar sweet would be bigger and cost maybe five new pennies.

        If that is what government inflation has done to the price of an insignificant sweet, imagine what it has done to the price of you house.

        One 2014 pound is worth about as much as ten pence in 1984.

        This is a matter of pride for the party John Redwood supports.

  4. oldtimer
    Posted May 7, 2014 at 6:12 am | Permalink

    High taxation, and the social and political attitudes driving them, over very many years has been responsible for the long term decline of UK exports. There is no sign that this will change in the foreseeable future. Unless and until it does the UK will continue to slide down the slippery slope to 2nd and then 3rd class status as a nation.

  5. Aatif Ahmad
    Posted May 7, 2014 at 6:40 am | Permalink

    The Bank of England staff recently wrote a paper on the issue of the real international investment position of the UK. If one looks at the investment position purely by reference to the book cost of UK overseas investment and investment by foreigners in the UK, then the UK appears as a net debtor.

    However, the paper pointed out that the book cost measure will not reflect the true reality. This is because the UK liabilities are mostly debt and hence they do not increase in value (recently, there may have been a shift towards equity, as foreigners buy UK companies/shares/land). On the other hand, the UK’s assets abroad are pretty much mostly equity investments as a result of acquisitions of foreign companies or greenfield investments in foreign factories/properties/businesses generally.

    The investment position is misrepresented because it shows the UK’s assets at book cost. So JCB’s factory in India is, for example, shown as an asset position of, say, $500m because that is what JCB invested in that factory in, say, 1995. However, the actual position is different because the market value of that factory today might by $5 billion, especially, as is likely, the factory’s sales have exploded since 1995 (as they have in fact).

    The paper concluded that the UK is actually a net creditor if one looks at the market value of its assets abroad. So they thought that the capital gains made by UK investment abroad more than covers the foreign debt incurred.

    Also, the reduction in investment income could be down to the fact that increasingly UK investment abroad is taking the shape of greenfield investment / acquisitions of controlling stakes in companies, rather than passive investment in stock exchange securities. It is likely that dividends are not paid out as much in the former (hence the reduction in yearly investment income), although the reinvestment of profits in the business should in the long term lead to a large capital gain which is not accounted for in the yearly external accounts.

    So the UK is like a giant hedge fund, borrowing cheaply at 2-5% rates, investing the funds in overseas greenfield investment / M&A and earning returns well in excess of the cost of the debt!

    • bluedog
      Posted May 7, 2014 at 12:12 pm | Permalink

      ‘the UK is like a giant hedge fund, borrowing cheaply at 2-5% rates, investing the funds in overseas greenfield investment / M&A and earning returns well in excess of the cost of the debt!’

      An excellent and entirely accurate observation. As long as return on capital employed exceeds weighted average cost of capital, all will be well. Problems occur when naïve politicians do silly things with banks (the Lloyds/HBOS merger for example) that creates a credit crunch which jacks up rates and destroys the value of financial assets. Then the equation works in reverse and wealth is destroyed big time.

      But this is a very high risk transaction-based economic model, hence the astonishing volatility of the British economy today. When the economy had a solid manufacturing base that sold into the common market of the British Empire, there was far less volatility and a genuine value add rather than a revaluation of assets. As we know, the United States insisted on the liquidation of the British Empire as a condition of the Lend Lease agreement.

    • margaret brandreth-j
      Posted May 8, 2014 at 5:02 pm | Permalink

      Thank you Aatif for your very uplifting and enlightening contribution.

  6. Andyvan
    Posted May 7, 2014 at 6:47 am | Permalink

    So much for the “economic recovery”. It is an illusion created to boost Dave’s chances at election time. Happens every cycle and does massive damage to the economy yet the gullible still fall for it. The total failure to even grasp what the underlying problems are in Britain has led this coalition shower to water down whatever ideas they had to cut government spending and continue borrowing and printing money in vast quantities. Now comes the reckoning. We have to start selling the house to foreign interests and pay rent just to live here. That will continue until the pound collapses and then everything goes on sale 99% off to anyone with some foreign currency. All because we haven’t got the wit to stop politicians spending money like a drunken sailor in a knocking shop.

    • Lifelogic
      Posted May 7, 2014 at 11:58 am | Permalink

      “Boost Dave’s chances at the election” – without a UKIP deal the chance of a Tory overall majority is virtually nil. Even with a UKIP deal it is still rather unlikely under heart and soul ratter Dave. They have half the support of both UKIP and Labour for the EU election shortly.

  7. Gary
    Posted May 7, 2014 at 6:49 am | Permalink

    “Our exports to the rest of the EU went
    up much less than those of many
    countries which stayed outside the
    arrangement.”

    That’s because we export financial services and its heyday is now gone. Along with the 30 years of falling rates. Hopefully cryptocurrencies, out of govt control, will put an end to Big Govt once and for all and people will be required to add value not skim value.

  8. Narrow Shoulders
    Posted May 7, 2014 at 7:22 am | Permalink

    This country can not often compete with emerging economies on price due to our wages and cost of living. This despite importing minimum wage labour in droves which government then subsidises with housing benefit and tax credits.

    The solution to our balance of payments deficit can only come from the quality of our products and services. This will be driven by developing advanced technology and ideas. This in turn must be resultant of better education. Everyone does not need to be academic students, many will benefit from trades and design skills. We do not need masses at University nor everyone to attend a comprehensive. The return of grammar and secondary schools and technical colleges would be welcome.

    In the meantime let us all buy less imported tat.

    I am unsurprised that being part of the single market offers others more opportunity than the UK. The EU club protects certain countries’ industry and agriculture and then allows cheap production access to other markets. Offshoring can only benefit the corporation and the host countty not the UK as a whole.

  9. Ex-expat Colin
    Posted May 7, 2014 at 7:34 am | Permalink

    This is really deep down in the enormously too difficult file I think. Don’t want to sell assets except the Lib/Lab/Green gang. They are not assets though, just plain and simple dangerous liabilities.

    Case of restructure this place dumping the EU first. Probably needs the Digby Jones type on a very short fuse. That would be to configure/reconfigure industry in direct competition with China and that is likely impossible. We have idled too long allowing China in particular to acquire raw material rights and buy up our production facilities.

    Trying to lead the world in windmill technology is sheer lunacy and likely temporary. Climate modeling is software that is IPR (why?) and hardly high tech. Fortran and a bit of MS spreadheet. Underlying theory/premise – massively weak.

    Technology is the way forward and the only one, apart from services which the EU and any other country could remove from us PDQ. Aircraft/Space/Medicine/Defence (partly).

    Vehicle assembly can move anytime and largely depends on given subsidies. Ford! That takes components with it from what I see of identifiers marked on washing machine/car parts.

    War…oh no, thats a major loss maker and always unfinished. Good at that?

    Dunno really ?

  10. John E
    Posted May 7, 2014 at 7:47 am | Permalink

    There are three basic ways to create wealth.
    1. Grow crops as a farmer.
    2. Extract minerals and hydrocarbons from under the ground.
    3. Turn the primary products into manufactured items.

    Other activities help create wealth to the extent that they enable or make more efficient the above. We need a policy that gets back to these basics.

  11. Bert Young
    Posted May 7, 2014 at 7:56 am | Permalink

    We have a regime that attracts foreign investment but allows the subsequent organisation to avoid paying tax . This does not make sense and we should legislate to stop the evasive measures . Allowing organisations to build up massive tax free balances in Bermuda does nothing for this country or the USA . Instituting export incentives and lowering taxes is the sure fired way to boost our economy and the bottom line . As a matter of interest , I have not yet received a reply from 10 Downing St ; I requested a leader who would take us out of the EU – another considerable drain on our resources .

  12. Gary
    Posted May 7, 2014 at 8:10 am | Permalink

    An interesting side of the research on the effects of migration is that it increases trade overall but immigration increases imports much more than exports.

    Getting more UK citizens to emigrate would help the trade deficit.

    The current account deficit isn’t only down to trade and returns on foreign investments. We also have transfers like the net contribution to the EU and foreign aid. So in a roundabout way we are giving money away that means we have to either borrow or sell assets in the UK.

  13. Martin
    Posted May 7, 2014 at 8:17 am | Permalink

    One of the arguments that folk have made against joining the Euro was that keeping the Pound meant it could devalue to make exports cheaper and imports dearer. A sort of automatic balance of payments stability mechanism.

    This hasn’t happened. I guess you are implying it is because we are selling the proverbial family silver.

    UK governments often make decisions in an emotive way.

    Air Line Passenger duty is popular with the politicians because few electors have to pay it. It is however clobbering the UK airline sector. Transit passengers and others avoid the UK because of it.

    Nu-Labour didn’t join the Schengen area to try and look good in the papers. Business travelers have to spend more times in queues. There is more visa hassle for visitors who come to the UK.

    These two items have made the UK more expensive for potential buyers of our goods and services. Add to that the jingoist tripe in press/TV and we are not as welcoming as we could be to potential buyers of goods and services.

  14. Brian Tomkinson
    Posted May 7, 2014 at 8:20 am | Permalink

    It all brings back unhappy memories of Harold Wilson and continuing balance of payments crises. Also, under pressure from a disunited party, Wilson reluctantly agreed to hold the 1975 referendum on our membership of the European Economic Community – the Common Market. He claimed to have renegotiated better terms of entry and, ably supported by the Conservative party, CBI and others with vested interests, deceived the public into voting Yes to stay in. Perhaps Cameron is better described as ‘the heir to Wilson’ rather than his own claim to be ‘the heir to Blair’. Neither description is creditworthy.

  15. Iain Gill
    Posted May 7, 2014 at 8:25 am | Permalink

    Sell em all our houses, after all they really are worth all that money :)

  16. Bob
    Posted May 7, 2014 at 8:35 am | Permalink

    Is it possible that investors from countries where tax is voluntary are using their untaxed wealth to purchase UK properties and then receive rental income funded from housing benefits?

  17. Andy
    Posted May 7, 2014 at 9:09 am | Permalink

    “If we cannot export enough goods and services to pay for all the imports, and if we no longer have enough interest and dividends coming in from our overseas holdings to offset all the interest and dividends now going out, we need to find another way to pay the bills. We have to either sell some assets to foreigners, or borrow money from abroad to keep hold of the assets we have. It amounts to the same thing in the end. If the UK does not sort out its balance of payments deficit, the loans will have to be repaid by selling some underlying assets.”

    This is not true. If a foreign company invests £1m here setting up a new company, and that company imports £1m of widgets, that looks like £1m extra trade deficit and £1m capital account surplus. The imports are not something that will one day need to be paid back.

    Trade Deficit = Capital Account Surplus
    Capital Account Surplus != “Selling assets to foreigners or borrowing from foreigners”

    Reply If the widgets are sold on to us we have to be able to pay for them!

    • Andy
      Posted May 7, 2014 at 10:15 am | Permalink

      “If the widgets are sold on to us we have to pay for them”

      True, but that doesn’t change the point that you can’t look at the trade deficit and say “that’s us importing more than we export, so we will have to sell assets to pay for it.”

      The “us” and the “we” are aggregates of foreigners and nationals. Foreigners importing goods into the uk for their own consumption count towards a trade deficit, but that’s not something that uk citizens will have to pay back.

      • Mark
        Posted May 7, 2014 at 3:01 pm | Permalink

        Foreigners can only pay for personal imports from their own resources. If they transfer funds to the UK to do so there is an offsetting capital transfer. If they use their UK earnings to do so, it is no different to a UK household buying foreign goods.

        • Andy
          Posted May 8, 2014 at 6:41 pm | Permalink

          Yes, that’s the point. There can be an offsetting capital transfer to the UK to buy the imports.

          So you can’t see a trade deficit and say that it’s either UK people selling assets, or borrowing to fund the imports. There are other ways to balance the books, like a capital transfer by a foreigner.

          This common mistake (trade deficit = selling assets or borrowing) has been made in three top posts to this blog in the last week.

  18. Robert Taggart
    Posted May 7, 2014 at 9:59 am | Permalink

    Perhaps if Blighty was to make the things we want – we would have no need to import them ?
    Self Tie Bow Ties – particularly the ‘louder’ ones – be difficult to find over here. Next to no shops sell them, and, very few internet businesses likewise.
    Ergo, this Limey has to purchase most such apparel from over ‘the pond’ – it be well worth our while, but, a loss to our economy.

  19. Neil Craig
    Posted May 7, 2014 at 9:59 am | Permalink

    Allow the building of a factory mass producing small nuclear reactors of the sort Hyperion designed (app 250 GW). The only thing preventing this is government regulations. With a sensible regulatory regime the market could easily raise the capital (or the government could by not building HS2). Would be worth a bit under £100 bn a year.

    • Vanessa
      Posted May 7, 2014 at 4:06 pm | Permalink

      Neil – government regulations or EU regulations?

      • Neil Craig
        Posted May 8, 2014 at 12:10 pm | Permalink

        Both but I think most of them are under our control (as a UKIPer I also want out from under the EU).

        It is certainly the case that the Hinkley plant, at £16.5bn is 4 times more expensive, and at 10 years, taking more than 3 times longer, than a very similar plant, designed and built by European companies, in China.

        Mass production is inherently much cheaper than bespoke (imagine the cost if every 747 was bespoke on site).

        Taking all 3 factors together with the inherent inefficiency of our windmills suggests electricity prices could be cut by 98%.

  20. Keith O'Leary
    Posted May 7, 2014 at 10:18 am | Permalink

    A little less red tape from GCHQ please. I do not understand why they want to control the export of computer servers (containing encryption) from the UK where they are considered Mass Market and freely available in the vast majority of countries.

    • John E
      Posted May 7, 2014 at 2:56 pm | Permalink

      I don’t know the details here but sometimes I think we are the only ones in step on some of these issues. Many years ago I worked on material that was deemed Secret in this country but unclassified and freely available in the US. At the time I thought we were the crazy ones but given subsequent events I now think we were right to be concerned and the US was naive.

  21. David Cockburn
    Posted May 7, 2014 at 11:14 am | Permalink

    JR raises here the key issue in the AstraZeneca vs Pfizer affair. For so long as we have a payments deficit we must keep selling our assets to pay for imports or else borrow the money.
    However it does still matter whom we sell to and it would be nice to have a choice of suitors for AZN rather than being stuck with a company which has demonstrated its enthusiasm only for cost cutting.
    As we should have learned, you can always make a Pharma company look good for a few years by failing to invest in successful new product development.

    • forthurst
      Posted May 7, 2014 at 4:15 pm | Permalink

      “For so long as we have a payments deficit we must keep selling our assets to pay for imports or else borrow the money.”

      For as long as we keep selling our assets, particularly businesses, to pay for imports, our payments deficit wil continue to grow which we will have to pay for by selling even more assets or else borrowing even more money. This does not appear viable as a long term solution.

      The idea that we are obliged to sell excellent businesses like Astra-Zeneca in order to pay our way is preposterous. Let’s continue borrowing money instead until foreigners take fright and sell sterling so that our exports become cheaper and imports, dearer. We could also increase VAT for electrical and electronic goods which typically are imported.

  22. behindthefrogs
    Posted May 7, 2014 at 12:49 pm | Permalink

    We need to do two things, increase exports and reduce imports. While many factors affect this the most significant is probably price.

    The main factor affecting price in these cases is the cost of labour. Quite simply if we reduce the level of employers’ NI contributions this improves our chances of import replacement and the cost of exports. This should be done even if it means increasing the rate of VAT.

    If we look at various issues raised for health reasons etc. it will be seen that other proposals like minimum alcohol pricing, a sugar tax or equivalent action, reducing smoking, etc all help to reduce imports.

    Similarly we need to look at other areas like our energy use. Most of the green proposals help to reduce imports and one of the strong arguments for fracking in the UK without reducing other green initiatives would lead to lower imports of coal and gas.

    • Iain Gill
      Posted May 7, 2014 at 11:07 pm | Permalink

      Its not the cost of labour at all. Its the cost of electricity, the cost of the emissions gear mandated, the cost of health and safety kit, the cost of paying properly for intellectual property used such as licences, and so on. Any idiot can produce more cheaply with little or no anti pollution gear, little or no safety kit, not paying licence fees, with cheap electricity. The UK workforce can out compete the rest of the world if they are allowed to keep their best innovations (ie their international owners do not immediately hand their advances over to their other facilities elsewhere in the world), and with reasonable and not excessive anti pollution and electricity pricing regime.

      • behindthefrogs
        Posted May 8, 2014 at 11:01 am | Permalink

        If you traceit back far enough the cost of almost everything that you list goes back to the cost of the labour in providing or producing them.

        Take for example the cost of energy. If you trace back the costs they all come back to the cost of digging the coal, drilling for the oil or the cost of the equipment used. The cost of the equipment used again traces back to the labour involved.

        The more doubtful cases are licences and taxes but one can still argue that these eventually trace back to labour costs.

        • Iain Gill
          Posted May 8, 2014 at 3:22 pm | Permalink

          no the cost of energy in this country is dominated by fake green nonsense forcing the use of expensive windmills and the like which are not economically viable except when the state manipulates the market.

  23. Denis Cooper
    Posted May 7, 2014 at 1:28 pm | Permalink

    About fifteen years ago when we were being strongly urged to join the euro by certain people one of their favourite arguments was that if we didn’t join the euro then we would lose foreign investment. In fact that didn’t happen, but during that debate it became apparent that foreign investment is not an unalloyed good. But far worse than a foreign company setting up a new business and then taking profits out of the country is a foreign company taking over an existing business and shutting down all or large parts of its operations in this country, either to eliminate that competition or just to maximise its profits.

  24. Stephen Berry
    Posted May 7, 2014 at 2:41 pm | Permalink

    I very much suspect that Aatif Ahmad and the Bank of England are right and John is wrong.

    20 years or so ago the IEA published a booklet which attempted to measure the value of British overseas investment. It concluded that measurement by book value grossly underestimated the worth of British assets overseas.

    Aatif’s example of JCB’s stake in the factory in India is typical. These sort of investments tend to rise in value.

    At the end of 2011, the UK had almost half a trillion dollars invested in the US, representing 17% of all foreign direct investment there.

    Investment by the UK is substantially higher than that of other large foreign investors including Japan, the Netherlands, Germany and Switzerland.

    By comparison, India and China’s investments are tiny: they do not come close to reaching 1% of all foreign direct investment. Of course, China does like buying U.S. treasuries, but for various reasons, I do not think that is so clever.

    In 1939, the UK paid for 25 per cent of its imports from the earnings on overseas investments. Unfortunately, WW2 decimated much of these investments. But why, after 70 years of peace and a largely open economy, should the UK not be moving back towards this pleasant position?

  25. Posted May 7, 2014 at 2:44 pm | Permalink

    “The Coalition government wants us to export more. ”

    If so, why doesn’t the UK govt stop selling gilts on the international markets? If the sales of treasury securities are included in the trade figures then everything balances. It is only because the rest of the world wants to buy these securities that the UK can purchase more from overseas more than it sell overseas.

    It is the the sale of these securities which pays for imports not the sale of assets. They would be included in the overall current account which, even so, is still in deficit.

    Because the external account is in deficit, money drains out of the economy to pay for those imports. How is it replenished? By government deficit spending. It recycles the money from the sale of securities back into the economy by spending it back in!

    The budget deficit is not what is is claimed to be. It can’t simply be reduced by cutting spending and raising taxes. That just won’t work. The external deficit needs to be tackled first – but it isn’t being tackled at all. Its been a long time since trade figures were given any real prominence in the financial news.

  26. Vanessa
    Posted May 7, 2014 at 4:03 pm | Permalink

    This is the trouble with huge bloated government, they seem to think money grows on trees and go on and on spending – HS2 anyone?

    We will eventually run out of things to sell – then what? This government promised to get the deficit down (not the debt) but it is so minimal that both are still rising into the clouds. One day we may get some competent minister who has the strength of character to actually pull in the reins and stop all this idiotic spending. Is there a “Mrs Thatcher” out there somewhere?

  27. waramess
    Posted May 7, 2014 at 5:58 pm | Permalink

    “How else do you propose we pay for all the excess imports if we cannot export more?”

    Well, the answer is quite simple, you eventually (soon) will not be able to pay for them and you will not therefore be able to import them. The other alternative, of course, is that you join the Euro in haste and end up with an amazingly awful rate of exchange.

    Neither scenario can be realistically ruled out and has been caused by the appalling management of the economy by both governments.

    Keep growing and the funds for investment decline as taxes are raised to support government activity.

    Concentrate on overcoming this by inviting big companies to set up shop with big subsidies, rather than reduce the size of government, and thus taxes, and you squeeze out the little guy in the garage with a good idea entirely.

    This is why your exports are shrinking; the small guy often gets bigger and starts to increase his sales more rapidly by exporting and now you have few Dyson equivalents left.

    Exports are shrinking, imports are growing as income is redistributed to give the unemployed the comforts of life and government gets bigger adding to the import bill whilst producing nothing other than more red tape.

    What a disaster, constructed by both parties over a period of sixty years and now they look for a silver bullet.

    It doesn’t exist and the problem can only be remedied in the long term. Regrettably your only “get out of jail free” card is to join the Euro at any rate the French and the Germans will impose on you or to impose exchange controls.

    What a mess. Make sure you are not in government when this happens. At least then you will have a chance of pointing the finger.

  28. Terry
    Posted May 7, 2014 at 6:11 pm | Permalink

    John, you are in the wrong job.
    I shall re-phrase that -You are not in any job within the Coalitional Government that is simply crying out for your talents. If you are not chummy with Dave then he won’t want you in Number 11 but strong old Conservative logic should dictate to him that you are appointed, at the very least, Biz Secretary and then ASAP. Like, on Monday.
    I see you as a very loyal member of the Tory party (perhaps naively) with the necessary experience of the biz world, who can and would make a difference to the benefit of us all.
    Alas, poor man management rules OK, in Downing Street because the old-boys club still reigns supremely.
    Mrs T was the most successful PM, ever. She was a success through peace and war and turned this wreck of a country back into a world power.
    She was not born and bred through Whitehall and Westminster, she came from ordinary society and thus was able to recognise the talents of persons who had not been blinkered by a privileged upbringing. So where are the talented now?
    The rot set in when John Major lost (quite rightly) but then disaster struck. ‘Mr sickenly Smoothy’ from the Northern equivalent of Eton, jumped in and filled his and her’s boots. All at the expense of Great Britain plc. And so it continues.

    Until the Political leaders grasp that when they care for this country as much as the indigenous population AND they appoint Ministers for their talents and not their school ties, we shall be in a permanent state of decline. If Dave does not act accordingly post EU elections then we are done for. Labour will get back and hand over our Sovereign State to the Marxists regime in Brussels. And that will culminate in WWIII. Eventually. Do we really want to take that risk?

  29. mickc
    Posted May 7, 2014 at 6:38 pm | Permalink

    Possibly the destruction of so much productive capacity under Howe’s Chancellorship wasn’t such a clever trick?

  30. bluedog
    Posted May 7, 2014 at 10:23 pm | Permalink

    Mr JR, your correspondent can remember the time when all British exports of services were described as ‘Invisibles’. It seems that today, with some 80% of economic activity in the UK in the service sector, that virtually all exports are ‘invisible’, possibly in all regards.

    What follows is another attack on the VAT. Of course, other EU nations have a VAT too, and it was sold to the commentariat and the electorate as a tax on consumption. It is of course, nothing of the sort, being a turnover tax with a number of significant exemptions, principally essential foodstuffs and financial assets. VAT greatly favours service sector businesses where the assets are people. When the people sell a service, an invoice is raised and paid with the result that there is minimal funding cost to the business. In addition, most service activity is repetitive and relatively low value, even at the high end with charges for consultancy work in civil engineering, the law and similar professions. In these instances the total bill may ultimately be high but the client is usually invoiced monthly as work continues.

    Compare this to the manufacturing process of a motor-vehicle, a ship or an aircraft, or indeed any other large elaborately transformed manufacture. Materials have to assembled and as the stock turn on prolonged manufacture is very low, the VAT funding cost is inevitably high. Worse, VAT is still charged even if the product is sold at a loss. No economically rational individual would therefore undertake the manufacture of a product under these conditions.

    Let’s take one example. Not surprisingly, almost the only shipbuilding in the UK today is for the Royal Navy, a customer whose fleet happens to be a shadow of its former self. Commercial shipbuilding has nearly died out with most ships on the British register being built in Asia. For an island nation that used to have a vibrant fishing industry (that’s another story) which lead a host of regional shipyards turning out excellent small craft, this is a terrible and unnecessary decline. Fishing and shipbuilding went hand in hand, creating wealth and employment around Britain’s 12000 mile coast-line.

    An important attribute of VAT is that the trading of financial assets is zero-rated. It is therefore economically rational not to make widgets by adding value, but to trade the equity of the companies that try to make these widgets. But trading financial assets adds no value at all, despite what the investment bankers want you to believe. The only value added is a revaluation of assets, what used to be called a directors valuation. The market is gullible enough to believe these promises on the greater fool basis.

    It seems essential that the British tax system be restructured away from this unbalanced favouritism of the service sector. The British people are actually very good at making tangible assets yet their tax system mitigates against this activity.

  31. John Wrexham
    Posted May 7, 2014 at 10:52 pm | Permalink

    Not so long ago, people with money would invest in unit trusts and shares both here and abroad so helping our balance of payments. Nowadays the tax system enourages us to invest in buy to let housing and instead make money by overcharging people rent because the housing supply is restricted. Politically on a five year time frame it may make, but economically it is a dead-end policy that in the long term is stifling work incentives and real entrepreneurialism.

  32. Lindsay McDougall
    Posted May 8, 2014 at 12:45 am | Permalink

    Would someone please explain to me: if we are in such desperate trouble with our balance of payments, how is it that our currency has hardened?

    Reply People are buying our assets and need to buy our currency to do so.

  33. Frank salmon
    Posted May 8, 2014 at 9:41 am | Permalink

    Suffice to say that a negative figure in the current account cannot be sustained indefinitely. The result would be impoverishment as we struggle to buy imports and also struggle to sell exports. A declining currency only buys time in the short-run. Over emphasis on the service sector has hastened manufacturing decline. Howe’s record was fine. Our nationalised industries were already bankrupt and uncompetitive. What was left was good, but Brown destroyed them with taxes, directives and investment in services. We lost 50 percent of manufacture and now produce less than agricultural France……

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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