Warnings for the Road Ahead
April 1, 2010
Now that the dust has settled on a highly political Budget, it has become ever clearer that our nation desperately requires strong Conservative governance to put our national finances back in order. Whatever the remedies within our reach should we secure office at the imminent election, we will also have to keep a close watch on events in the global economy which will surely have a significant bearing on the British economy in the years to come. There are already some worrying signals about the pitfalls ahead:-
1. If their governments are to be believed, the only way out of these economic troubles for all Western nations will be ‘export-led’ growth. I am afraid this begs the obvious question of just who will be doing the importing?
When the financial crisis hit, China acted earlier and more aggressively to forestall a serious downturn than any other large economy by engaging in massive fiscal and monetary stimulus. However, as most countries now agonise over how to keep their barely reviving economies growing, China is already looking to slam on the brakes. With policy makers becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles as a result of last year’s aggressive expansion of credit, China’s central bank has now moved to reduce lending to companies and individuals by, among other measures, requiring large commercial banks to increase the amount of cash they put in the central bank.
This is just one sign that points towards the likely return of market turbulence. If China brakes too hard, it risks slowing global growth overall and throwing other countries, including the United States, back into recession. Indeed when China announced its policy, share prices were sent sliding across Europe and America now that China’s commercial banks have become ever more important lenders to the rest of the world following the contraction of lending by US banks. It is perhaps for this reason that despite the significant devaluation of sterling, widely expected to revive exports, a majority of British companies have reported that their export order books remain below normal.
2. We should also beware the looming threat of protectionism. Lessons from the crash of the 1930s over trade protectionism appear, to date, to have been learned. However, ‘beggar thy neighbour’ sentiments may manifest themselves in monetary policy (especially exchange rate). In the UK we have already seen the benefits of devaluation by some 25% over the past two years which may help alleviate the worst economic ravages in the months to come but we should not assume that this competitive advantage will persist. Indeed we may be losers as other currencies devalue in the years ahead; China, to name but one economic rival, also seems determined to use monetary policy to avoid what many would regard as a realistic revaluation of its own currency. The impending US legal judgment over alleged unfair competition might also result in tariffs being levied against Chinese imports. Clearly this would represent a dangerous escalation in economic tensions.
3. Finally, the global imbalances that were the underlying cause of the financial downturn have not been solved, only parked. Unless there is a smooth transition away from the racking up of huge trade deficits and currency surpluses, the risk is that we simply repeat the policy mistakes culminating in a further crisis by the end of this decade with even greater imbalances.
We can no doubt take a positive hold of a large part of our economic destiny but it will inevitably involve a great deal of pain, a reappraisal of our expectations and a cold dose of reality over the degree to which we are at the mercy of global events (which will likely be primarily influenced by the way in which China handles its economic policy in the years ahead).
Our goal upon emerging from the economic gloom must be a fundamental rebalancing of the economy in favour of the wealth-creating sector, not a further public spending splurge. It is for this reason we should take little heart from the recent fall in unemployment, caused primarily by a growth only in public sector jobs. What we truly require is a proper strategy for growth, low taxes and a smaller state as a choice apart from this activist, intrusive government.
Sadly, in addressing precious few of our national challenges, the Budget perfectly illustrated the legacy of an administration that any objective observer must sincerely trust is now in its dying days.
It offered woefully little hope and inspiration to our young people, who are now beset by the ravages of an unprecedented growth in graduate and youth unemployment. If our nation continues to believe that ‘Big Government’ is the answer to all our travails and marginalises enterprise and entrepreneurship small wonder that many of our most promising youngsters will conclude that their future lies elsewhere.
A little over two decades ago I left university convinced that the UK was a place of infinite possibilities. I set up my first business as an undergraduate, got myself professionally qualified, sold my business, set up a second enterprise – all by the age of 29 and all here in the UK. Today’s most talented young Britons will graduate with average debts in excess of £20 000 and the twin prospects of uncompetitive, high tax when they find work and collectively needing to repay the debts that my generation and my parents’ generation have racked up over the past decade.
Essentially we are telling them that the price of British citizenship is to clear up the financially catastrophic economic complacency of this Labour government and foot the bill for over-consumption by our generation.
Unless we can contrive to present our brightest and best youngsters with a more attractive financial proposition we should not be surprised if they leave these shores. Some have highly globally mobile skills and we urgently need to convince them that this nation offers the exciting opportunities and limitless potential. If we do not, it is they who will vote with their feet.