The madness of chancellor George? The UK's current account deficit is leading us into a debt trap

Michael Howell
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Merkel And Osborne Attend German Industry Gathering
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In economics there are few unrelated events, so Britain’s whopping current account deficit (seven per cent of GDP) for the final months of 2015 is the latest wake-up call for bigger future problems.

Deficits of this size warn of trade uncompetitiveness, but more worryingly the latest jump underscores the sharper on-going deterioration in overall UK private sector finances.

From the giddy heights of an eight per cent GDP surplus in 2009 and using IMF projections, our private sector is slated to hit a bigger than two per cent deficit within five years.

Time to switch off the lights?

Deficits have plainly happened before, but each previous slippage heralded poor future economic performance and often recessions.

Thus, if the Cameron government continues its austerity programme and delivers its promised budget surplus by 2020, someone may have to switch off the lights. By the simple arithmetic of national finances, the foreign, government and private sector financial balances must together add up to zero.

Read more: Should the UK worry about its record current account deficit?

Put differently, when we have to pay away increasing amounts of money overseas for our net imports and the Treasury plans to take ever more cash out of the economy, the private sector will quickly move into deficit, or in plain-speak get deeper into debt.

We have become slaves to ideology

Many would agree that since 2008 we have at best stood still financially, but in fact things are worse because debt as a percentage of GDP is going up and not coming down.

True, the Bank of England is now worried by too much buy to let mortgage borrowing, but this misses the elephant in the room.

There is a broader debt build-up that is being forced on to the private sector by bad policy-making, not house price speculation. We have become slaves to ideology and discarded our common sense. Any parallel with Mrs Thatcher’s cutbacks of bloated and wasteful government spending is wrong-headed because the private sector then remained in healthy financial surplus throughout.

Also recall that the 2008 debt crisis was not about too high government debts, but too high private sector debts and the multiple tranches of foolhardy lending dished out by our banks.

Private vs public

In short, given a choice, too much private sector debt matters far more than too much public sector debt. Britain’s private sector debt burden stood at a sizeable 160 per cent of GDP in 2014, or not much different to its pre-crisis level.

Our burden is now bigger than Germany’s, America’s, Canada’s and Italy’s and similarly-sized to the private sector debts of the two other G7 members, France and Japan. More worryingly, it is getting worse.

We must end government austerity and start spending sensibly on new infrastructure to avoid this debt trap.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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