All our yesterdays: reliving the glory days of the Lawson boom
If last year was the second worst for the UK’s balance of payments deficit since WW2, why doesn’t the Deputy Governor tell us when the worst was?
In the bad old days, before Mrs Thatcher’s first government set capital free by abolishing exchange controls, a balance of payments deficit was the biggest single constraint on how fast the UK economy could be allowed to grow. Speed up growth by increasing spending or cutting taxes and, as night follows day, imports would be sucked in until a burgeoning sterling crisis forced a Chancellor of the Exchequer into a humiliating U-turn. Governments of both colours faced the problem, often a bequest from an outgoing administration (Labour in 1951, the Conservatives in 1964 and especially 1974).
With this in mind Ben Broadbent, the Deputy Governor of the Bank of England, has just made a reassuring little speech in which he told us we no longer need to worry. Not to worry, that is, about the fact that at 4.5% of GDP, the UK’s balance of payments deficit on current account in 2013 was the second highest annual figure since the end of the Second World War.
Why shouldn’t we worry? Broadbent made two points. The first is that the UK has a large overseas balance sheet. The current account is about the difference between the trade flows (exports and imports), asset income and transfers. The balance sheet is about assets and liabilities. The second is the UK’s robust policy framework.
I thought three things – and then realised Broadbent had forgotten to tell us something.
First thing: claims for a robust policy framework are best left to history, particular when the claim is made by one of the proprietors. I haven’t checked but was the Bank saying its policy was other than robust in say 2006 or 2007?
Second thing: what is sauce for the goose is sauce for the gander. If imbalances in annual “flows” (deficits or surpluses) with the rest of the world should be judged in the light if the underlying position on assets and liabilities, why shouldn’t we judge other imbalances the same way? Why, for example, when condemning a public sector deficit, shouldn’t we at least allow a peek at the public sector’s assets and liabilities in mitigation? At the very least, such a view would cause us to think positively about public sector investment (public borrowing to create a public asset). It would also cause us to look askance at give-away sales of public sector assets.
Third thing: as we have explained repeatedly, the balance of payments is joined at the hip to the surpluses or deficit of the public, household and corporate sectors. A balance of payments deficit for the UK is a surplus with the UK for the rest of the world. If the rest of the world has a 4.5% surplus with the UK, then the three other sectors must have a combined deficit of 4.5%. It’s just accounting: the accounts must add up. If we don’t have to worry about that 4.5% surplus, then we don’t have to worry about 4.5% of some other sector’s deficit. Broadbent doesn’t tell us which.
So what did Broadbent forget: if 2013 was the second worst, when was the worst? In his speech, the Deputy Governor dwelt at length on the shocking year of 1976. Certainly there was a sterling crisis that year. Certainly the UK suffered the abject humiliation of having to call in the IMF to help sort it out. Almost certainly income inequality was also at its lowest level ever. But as the graph of the annual balance of payments below shows, once the data was cleaned up, 1976 was a pussy cat year for the balance of payments with a deficit of just 0.8% of GDP. How good is that? Well one way of putting it: better than every year since 1998!
So if not 1976, when? The answer, as you can see, is: 1989 - at the height of the Lawson boom. Broadbent avoided drawing attention to this unfortunate parallel by having his deficit graph show four years averages (which hides the fact). And we know what happended next - six months later, in the third quarter of 1990, the economy crashed.