Our foreign rivals have bought up Britain. Now we are at their mercy
Decades of neglect have left the United Kingdom heavily indebted to other countries – at a huge cost
Reducing the deficit could be achieved through sustained austerity
We all know that there is a major issue concerning the UK’S national debt. The ratio of government debt to GDP will soon exceed 90pc, before hopefully declining in subsequent years. The Sunak government is focused on reducing the deficit with a view to bringing the debt ratio lower – understandably.
Other things equal, the higher the debt, the higher will be debt interest payments, requiring either higher taxes or a squeeze on other forms of government spending. And, as interest rates rise, this problem is intensified. In extreme conditions, the money to pay the debt interest has to be borrowed, or printed, leading ultimately to a surge in inflation or a financial crisis, or both.
Although having a high ratio of government debt to GDP is undoubtedly a serious potential problem, its significance is commonly exaggerated. For the first 60 years of the 19th century, the UK’S debt ratio was a good deal higher than it is today. And this didn’t stop the UK becoming the world’s hegemon.
Moreover, government debt is not just a liability. It is owed by the state to various other members of society, most of whom are British nationals (about 30pc of British government debt is owned by foreigners). In Japan and Italy, whose governments are even more heavily in debt than us, most of the government’s debt is also owned domestically. Accordingly, the term “national” is something of a misnomer. “Public” might be a more appropriate word to use, or “state”.
Interestingly, not only is the majority of Japan’s “national” debt owned domestically, but Japan has overseas assets vastly in excess of its liabilities to foreigners. In other words, it is a significant net international creditor. By contrast, the UK is in the opposite position. It is a substantial net international debtor. In many ways, this net external debt position is more “national” and more important than what people usually refer to as the “National Debt”.
A little history may cast some light on this matter. During most of the 19th century, the UK ran a significant current account surplus – that is to say, a surplus on the balance of trade in goods and services and net investment income. It used these surpluses to finance investment throughout the world, thereby building up a significant stock of overseas assets. These produced significant investment earnings.
Before the First World War, our net stock of overseas assets amounted to more than 170pc of GDP. Sadly, almost all of this treasure chest was used up to finance our efforts in the first and second world wars.
Since then, the UK has been in a very different position. As recently as the beginning of 1987, we had a net surplus of overseas assets amounting to 20pc of GDP. But since 1997 our net international asset position has been persistently negative. In 2021, it stood at minus 18pc.
Some other countries are much larger net debtors. The United States’ net asset position is minus 80pc of GDP. Within Europe, Spain’s is minus 68pc and France is minus 30pc. The identity of the large net international creditors will probably not surprise you – Japan at 72pc of GDP, Germany at 67pc and the Netherlands at 88pc.
In general, these net positions are determined by the current account of the balance of payments. In the UK’S case, we have persistently run current account deficits which have undermined our net international asset position. We have only managed to hold our own by a combination of a tendency to invest in assets abroad with higher returns than our liabilities to foreigners, and the tendency of the pound to fall on the exchanges, thereby reducing the international value of our liabilities.
Does this international asset position matter? Although it is rarely talked about, it does. It is a component of the wealth of the country’s citizens and it contributes to how living standards will develop over time. The fact that we are a significant net debtor means that unless we are peculiarly clever in our overseas investments, or take extra risks, there will be a persistent net outflow of interest payments and dividends abroad. For any given level of national output, this reduces the amount of resources available for domestic use. Interest payments on gilts held by foreigners are just a component of this.
And if our net international asset position worsens, it is the equivalent of negative net investment. This might not matter if investment in the domestic economy was strong. But investment in the UK economy is pathetically weak.
What is the solution? Last year the UK’S current account deficit was probably about 5.5pc of GDP. This year it is likely to be about 4.5pc. This needn’t be a problem in and of itself. With a floating exchange rate, the days of “balance of payments” crises are over. But the persistent deficit is a reflection of an unbalanced economy and a profound economic weakness.
As we know, things are currently pretty grim. But even so, as a nation, we are still living beyond our means.
Reducing the deficit could be achieved through sustained austerity by government and/or consumers. But that is not so much a solution as a punishment beating. Admittedly, we will always need to restrain the growth of consumption (including by government) in accordance with the growth of production (the Micawber principle, named for the indebted clerk in David Copperfield). But a correction to our international debtor status that does not involve selfflagellation comes down to the same thing as just about every other economic problem – faster growth of productive capacity.
Improved productivity holds the key but it will be difficult to achieve much without higher investment.
Of course, this is easier said than done. And it is no use just labelling any sort of spending as “investment”.
It has to be investment that produces good returns. Bad investment, such as the ludicrous HS2 project, is just like consumption – but without the enjoyment.