John Redwood’s latest blog discusses the UK’s balance of payments and the EU.
I have always thought the UK’s balance of payments deficit is a bigger problem than the state deficit, though the two are in part related. I have spoken about it often here and in Parliament. The reason is the longer we run a large balance of payments deficit the more money we will owe to foreigners, and the more of our industry and property will be brought up by overseas investors. Progressively a country loses economic control as it sells many of its assets and mortgages the rest.
A larger state deficit can in some circumstances be financed at home by lending to ourselves. We do not necessarily lose overall control of our destiny, but switch money and assets around amongst ourselves. The state can always repay the debt, though if it overdoes the borrowing it will end up repaying in devalued pounds, partially reneging on the debts through inflation. The state will pay for itself at the expense of domestic savers or by taxing productive people more to repay the debts. Done to excess it makes us poorer. A large state deficit may also mean having to accept loans from abroad. These are more difficult. These usually require repayment in someone else’s currency , so we do not have the power to simply print that. If we borrow in foreign currencies the debts may get bigger and more onerous to repay if and when our currency falls in value.
The EU model put out by the Remain campaign is a model for economic dependence. Taken to extremes it leads to bankruptcy as we have seen in Greece and Cyprus. They say they want to attract more overseas investment. They welcome more purchase of UK companies and assets by French nationalised industries or by German shareholders. That means running a bigger balance of payments deficit and placing ourselves more and more in hock to overseas investors. They do not come here out of charity or kindness. They come to earn a return, to make a profit and to take money out of our country from their activities. One of the main reasons our balance of payments has been deteriorating so quickly is foreign investors are now taking much more out in terms of profits, dividends and interest charges.
The Remain model welcomes German investors taking majority voting control of our Stock market, and accepts we will import German steel rather than make our own. They welcome large imports of German cars and French food products. They do not tell us the truth, that the UK has to compete to maintain and improve our living standards. We cannot afford to allow too many industries and services go uncontested. There are limits to how many activities we can give up doing altogether or can sell to overseas buyers.It is interesting that Tata wants to exit all steel making in the UK and also wants to invest in German steel making. By doing so it accepts the EU logic that Germany should as the creditor nation keep on strengthening its industrial base to export to the other states. They in turn become more dependent economically on Germany. We see the dangers of going too far down that road when you see what happen to an economy like Greece which is now very dependent on the goodwill of Northern European creditors led by the German state. The creditors forced a 25% cut in Greek incomes as they tried to rebalance their books.
Let us draw an analogy with an individual household. It is true that you can boost your spending power above your income for a bit by borrowing more to buy new things . You can also boost it by taking out a loan on your home or selling some of your furniture and other assets. Done in moderation you can buy assets on borrowings which go up in value and make you better off. Done to excess you can end in grave financial difficulty. You find out that you then have to work harder and earn more just to pay the interest on the extra debts. If you are not careful you will reach the position where the interest charges take up too big a percentage of your income and your living standards fall as a result. You eventually reach the end of your ability to borrow more. You also run out of assets to sell. You can only sell your house once to spend the proceeds.
I want the government to curb the national deficits. I want us to generate our own power, make our own steel,produce more of our own cars. I believe we can do this. It requires taking back control from the EU, cutting energy levies and prices, and redoubling efforts to create good conditions at home to produce and sell our goods and services. Leaving the EU will immediately improve our balance of payments deficit and give us back more of our own money to spend on our priorities as I have pointed out from my analysis of the balance of payments deficit. At the moment we are being made to borrow to send money to rich continental countries to spend on what they want.
Click here to read this piece in John Redwood’s Diary.