Wednesday, 31 May 2017

What happens next?

We're in a mess. None of the parties  promising good things if we vote for them will tell us, but tough times lie ahead. The symptoms are all around.Politics are unstable; the wipe out in Scotland, two elections and two referenda in three  years have broken the pattern of long periods of one party rule. Living standards are stuck, shored up only by record levels of debt. Growth since the Great Recession of 2008 has been pathetic.

Why? Because the British economy is failing. It can't now deliver. Manufacturing used to pay our way in the world but has shrunk from a third of GDP in the seventies to 10% today. The economy can't support the public spending, the services and the international committments  an advanced economy needs. Something has to give. No one will tell us what.

We can't pay our way in the world. The deficit is now 5% and rising, meaning that we must borrow overseas and sell off  assets to survive, leading to the highest level of foreign ownership in any advanced country with profits skills and demand exported as a result, creating a vicious circle where  sales keep the pound high and the high pound then boosts the deficit.

The North Sea oil was wasted to buy imports and keep tax revenues up rather than being invested as Norway has done, and is now running down.Membership of the European Union, supposed to boost us, now drains us with annual contributions around £17 billion and rising and a trade deficit of £ 50 billion, mainly with Germany accumulating ever larger surpluses which it won't recycle. We even have to  borrow to pay the bills to be damaged.

A gloomy prospect which will take tougher measures than we've experienced before to deal with it.Only two ways offer.The first is the Greek formula of squeezeing freezing and cutting to reduce costs, wages and public spending to new levels of competititveness ,building a low wage ,low cost,low skill economy.That painful process will take years It may not work even then if our competitors continue to grow

The second is the approach the young dragons have used of using a super competitive exchange rate to penalise imports and boost exports, building a powerful exporting sector benefitting from economies of scale and continuous upgrading. That means regional aid to spread the growth, an industrial policy to invest in new winners and sustain old ones, and  restraint on domestic demand to channel investment ,people and ability to exporting industry

Both are painful processes. The first reinforces existing trends. The second totally reverses the long term strategy of high exchange rates to please finance and fight inflation, free trade and market economics which preclude nationalistic economics and membership of the EU which prohibits the strategies Germany, China and the young dragons all used to grow. 

That's the choice the next government must make. Neither party seems inclined to think about it. Both would probably prefer to go on as we are with  a little tinkering and some redistribution. Yet to do that won't avoid damage. The huge debt bubble we've built up   to keep going may burst. The exchange rate of a country in peristent deficit must fall. Investors will flee and British firms escape, from prolonged uncertainty. Cuts in health, education , and housing will continue, unless we either increase taxes or boost the economy to pay for them. 

Which makes it time, more than time, to do some serious thinking about how we get out of the mess rather than the escapism of promising good things, happy times and an end to pain by voting for Snurple or Turple or even McGurple if you live in Scotland. If our politicians prefer to live in a fantasy world rather than tell us the truth they're condemning us to living in a much worse one.  

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