No balance in the payments

This week’s poor balance of payments figures for last month revealed two worrying facts. Despite the sharp falls in the pound, there has been no surge in exports to show us gaining market share as we become more price competitive. At the same time, imports have increased sharply as destocking ends, with no sign that UK industry is about to replace imports with home produced goods. Trade volumes both ways are up as the world economy recovers a bit, but there is no encouraging sign that we are about to improve our relative position.

After a decline of almost one quarter in the currency, you would expect both a surge in exports and a lively increase in import substitution. The absence of both so far implies several problems.

First, a lot of capacity was clearly lost in the recession. Factories were closed, people were made redundant. The last twelve years have seen industry decline as a result of high taxes and high regulatory costs.

Second, manufacturers have been finding it difficult to get bank finance for their activities. In need of cash, they have favoured putting prices up in sterling terms, taking advantage of the lower pound to do so. They have been forced to raise their margins on lower volumes given the shortage of finance.

Third, the UK in recent years has lost great swathes of capacity. JCB recently told us how small a proportion of their vehicle components they can now source from the UK. If you go into most clothes shops there are racks and racks of Asian textile products because the UK industry has been cut to the bone. UK steel plant is closing as demand falls.

We need policies that will help industry recover and build new capacity. That requires changes to taxes, regulations, and bank regulation.


  1. Brian Tomkinson
    March 11, 2010

    So far exports don't appear to be leading us out of recession. Please ask Labour to explain just how increasing taxation is going to end recession, rather than leading to a double-dip.

  2. Simon D
    March 11, 2010

    Sorry – its not on the cultural agenda. We don't do manufacturing any more in this country and it is deeply unfashionable to say you work in it. The formula for wealth is [uni + socially useless office job in the south east + six figure salary + a killing on the housing market + inheriting money from your parents]. You will be worth a million in no time at all.

    If you can't hack it in investment banking, law, accountancy, PR, the media etc., then try the public sector where salaries have been transformed and the pensions are fantastic.

    The Asians make: we consume. If you want to know where it will all end please apply to Messrs G. Brown and P. Mandelson at 10 Downing Street and remember that someone once said 'you can't buck the markets'.

  3. Andy Hoff
    March 11, 2010

    Couldn't agree more. There is almost no incentive to start a new business or expand an existing one. The returns on your investment of time and money are instantly eaten up by tax or other methods that government has of extracting money from us.
    It would be nice if the public sector remembered who works for who and stopped striking for yet more money and treating us like serfs.

  4. A.Sedgwick
    March 11, 2010

    The dreadfully negative balance of payments for a decade or more has always been my quick yardstick for assessing the dire state of our finances. The scant regard by Labour to the export of jobs has highlighted their hypocrisy. I think many companies have been very shortsighted and risk averse in relying on their manufacturing base being 8000 miles away. It is very difficult to buy British and with a limit I will pay a premium to do so. Basics of producing more of our own food and clothes should be a quick and easy target. As many of us write tax and bureaucracy has to be slashed for industry and business and as to the banks and others exporting call centres no comments are necessary.

  5. Lola
    March 11, 2010

    New Labour have continued the work of all previous Labour administrations and priced us out of more and more markets by adding more and more national overhead. One day the 'working classes' will work out just how much they have been shafted by Labour – New and Old – and seek a reckoning. I would right now quite like this to be in blood – and I am NOT at all a violent man.

  6. waramess
    March 11, 2010

    We need to encourage investment. Nothing more.

    Our industrial base has been reduced in scale over the past many years by high taxes and onerous regulation and for anybody to show suprise that a devaluation has failed to produce a surge in exports beggars belief.

    There is nothing wrong with higher interest rates which will encourage investment even though a few over-leveraged individuals may well default and a few over-lent bankers may get into trouble again from past adventurous lending. We cannot continue to bail these people out at the expense of the economy.

    Higher interest rates will encourage savings and will put in place a tenplate for investment but nothing will likely get this economy going again so long as we have high taxes and onerous regulation.

    High taxes are supporting a profligate socialist government who regard the private sector as a milch cow ready to provide the means to realise their pet projects. We cannot continue to bail these people out at the expense of the economy.

    Robustly cut regulation and robustly cut taxes at the expense of government spending and we will see prosperity, full employment and a strong private sector emerge.

    But you know all this, you need only to teach Cameron, Osborne and chums the meaning of robust

  7. A Griffin
    March 11, 2010

    My brother in law works as head engineer at a steam railway. He told me one year ago that his long term British small component suppliers were vanishing, making it much harder to source parts. My decorator tells me that he wouldn't know where to find Lincrusta now because a lot of his small suppliers of specialist stuff at the local town have disappeared. We had a wave of empty shops at my Market town last year and some were filled and the market stalls improved. However we seem to have started another period of closing down since Christmas and a lot of the new shops are on permanent sale. My joiner told me that staff at the local garage are all on three month notice even though the business has been there for decades. I visited Ripon recently and was shocked at the scale of empty premises. Here in the Yorkshire Dales the fields are brown from the cold and there is no sign of that lovely fresh green grass. The lambs are being born into what is rapidly looking like a barren wasteland and my heart feels heavy with dread at what the country has to face. Labour have destroyed us but the mirage is still held in place. I thank you for your blog which shows me that there is someone who can make sense of it all and that gives me hope.

  8. Javelin
    March 11, 2010

    How depressing.

    There are no long term plans from any politician being verbalised.

    We've even forgotten how to dream.

  9. JimF
    March 11, 2010

    This is totally unsurprising. There is no confidence to invest in the UK. There is uncertainty as to what tax rates will apply, whether the Country as a whole and the Gov. in particular actually wants to make and export things, how the currency and interest rates will pan out, and so on.

    If Labour get back, there can be no return of confidence. Their "golden rules" are in tatters with nothing to replace them. The Tories have no golden rules in the first place, and it will be essential in the event of a new Tory Gov that some sort of fixed platform is laid down for business to have confidence to invest.

  10. aws
    March 11, 2010

    John, I'm shocked to hear you arguing for industrial policy. I would have thought you of all people would understand that the most effective engine of economic growth is the free market, unfettered by the interfering of bureaucrats.

    reply: My idea of industrial policy is about lower taxes and less regulation, not about subsidies and backing winners.

  11. Acorn
    March 11, 2010

    Have not posted for a while on this site, but JR's comment above is serious and a little worrying. Savings minus Investment equals Exports minus imports. For every nation that is exporting there are others importing; the whole caboodle has to balance in the medium term. The same applies domestically. The government; corporate and household sectors, can't all be savers and deleveragers at the same time for a given GDP.

    If JR is still allowing links, have a read – at least twice – of the following.

  12. Javelin
    March 11, 2010

    OK here's the stats

    It looks to be like a negative (borrowing and investment) feedback loop leading to a downward spiral.

    So when is the slide going to stop?

  13. John Iszatt
    March 11, 2010

    We are a small factory in Greater London and we are working hard to increase exports and we are being successful.

    Two export containers to China and increases exports to all other areas of the world including Australia, Romania and the Lebanon.

    This is despite little or no help from the government and pressure from our government owned bank.

    Come on UK factories, a bit of effort out there.
    The rest of the world does want to buy from you but they need help in finding you.

  14. Bill
    March 11, 2010

    A depressing read. Although I fear it is all too accurate. I think it is going to be very difficult to turn things round with an industrial base that has been allowed to wither on the vine for so long.

    Beside the obvious ( getting rid of Brown ) what can be done at this late stage to rapidly revive and rebuild our industry?

  15. emale
    March 11, 2010

    "First, a lot of capacity was clearly lost in the recession. Factories were closed, people were made redundant. The last twelve years have seen industry decline as a result of high taxes and high regulatory costs."

    My engineering company lost 60% of its turnover within the space of 2 months between Oct and Dec 08. The business has not returned. We operated 2 factories employing about 30 people in total making precision engineered components for the automotive, yellow goods, gas and other industries.

    Such a huge loss of revenue in such a short time, completely unbalanced our business and we found that our overheads could not be supported with the reduced level of sales.

    What I would like to have done, would be to make surplus labour redundant and for the state to meet the cost of redundancy from a fund provided by the employers contributions to the National Insurance scheme, as was originally intended. I would then have liked to mothball one of the production facilities and suspend payment of business rates.

    If I had been able to act in this way, vital capacity would have been preserved ready to take advantage of the opportunities which present themselves when the economy begins to recover.

    Alas, this was not possible and the company went into liquidation along with all of the jobs.

    As it is, because the properties and machinery were owned by our holding company, we have been able to resume production on a much smaller scale, but are still burdened with having to find a huge sum of money each month for rates. (amounting to nearly 10% of sales) when Employers NI is added, the tax burden is almost intolerable and I'm uncertain how much longer we can continue in these circumstances.

    But we are trapped because, since Hazel Blears changed the law to make owners of empty property pay full rates we have a choice, either to sell our properties, and make everyone redundant again, or have the factories demolished, this being the only way of avoiding the tax. Sadly many perfectly good buildings are being demolished for this reason – factories which will be needed for new businesses to start up in in the future.

    I haven't seen what the Conservative Party are proposing (if anything) to remedy this grossly unfair, and extremely damaging state of affairs, but I would welcome some reassurance that if they win the next election, the Conservatives would do something about this problem urgently.

  16. alan jutson
    March 11, 2010


    Devaluation of the Pound means that imported raw materials (which are not available in this Country) which have to be purchased from abroad, and are used to manufacture some products, now cost more, and so such products when supplied to the home market become more expensive, and the same exported goods lose most of their competitive advantage because of those raw material increases.

    Its a very sad picture of our manufacturing decline over many years, to which unfortunately I do not see much improvement for the future.

    Many of our skilled personel have long since left manufacturing for pastures anew, are now nearing retirement, or have retired. So few people will be left to pass on the skills learnt over past decades.

    So called Apprenticeships of the present, bear no relation whatsoever to the intense training that was given in years gone by, which produced thousands of highly skilled, highly Qualified personel per year into industry.

    I read in todays Telegraph that just 2 weeks on the job training at McDonald's, would gain you a Certificate in Work Skills. Equivalent to either a Level 2 BTEC in Work Skills, or GCSE Grade B or C.

  17. Mike Stallard
    March 11, 2010

    From here, in the Fens, it is all so obvious. As soon as people stop being able to make a lot of money through their labour and their skill and their honesty, the whole thing dries up.
    In the 1960s we were a place of farmers growing strawberries and apples. People made so much money that, would you believe it, Wisbech had the highest rate of taxes in GB. Dutch people flooded over here to work. "Travellers" came from all over the place to pick and do the fields. Then in came all the regs from the bureaucrats and the picky supermarkets and the competition from the airways and farmers were so snowed under that they simply rolled over and gave up. Lots of fields now stand idle all the year. Why bother?
    Now the farming locally has tanked, everything has stopped. We have the worst Comprehensive in Cambs. Our College of Technology is about to be moved away. Out Primary Schools produce illiterates. There is a ton of drugs and lots of crime and drunkenness. You are not allowed to talk about the "Travellers" because the Police are aware and do not like it.
    Now the government has decided to move right away from Wisbech to March and with it go all the goodies from the taxes.
    Oooh! It makes yer want to spit!

  18. Lindsay McDougall
    March 12, 2010

    Economists will say that we are merely at the bottom of the J curve. The value of our exports has dropped because the fall of sterling takes time to feed through into increased export volumes and import substitution.

    However, I have a hunch that John Redwood is right – structural damage is delaying an upsurge in exports.

    The remedy will include tax cuts for business (reduced profits tax and NI), combined with (of necessity because of the deficit) temporary increases in personal tax that will reduce domestic demand. Reduction of social protection will ensure that labour costs are contained as people price themselves into work.

    All this is a bit depressing for our standard of living but we have to get rid of all the red ink in the UK economy.

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