Anthony Hilton: Britain's trade deficit is a disaster waiting to happen

The fundamental test of whether an economy is healthy and competitive with the rest of the world is whether or not it can pay its way.

Can it earn enough money from exporting to buy the goods it would like to import? And if not enough people buy its goods, can the economy cover the balance through invisible exports, which are earnings from things like tourism and insurance, or with the income generated from the billions of pounds invested in factories and businesses overseas?

Time was that governments would be judged by this measure — the balance of payments as it was called — and would be thrown from office if they screwed it up.

Alec Douglas-Home spectacularly lost to Labour’s Harold Wilson in 1964, just weeks after announcing what was then the biggest trade deficit in history.

A quarter of a century later, Margaret Thatcher’s chancellor Nigel Lawson — though now largely remembered for his ill-fated boom — was at the time most notable for regularly promising a recovery in the balance of payments. It, like Godot, never arrived; Lawson departed.

But today’s Chancellor, George Osborne, barely mentions the trade deficit and it is interesting to speculate why.

Perhaps it has something to do with the fact that never in history has it been so bad, a fact which sits uneasily with the more frequently heard claims that ours is the best-performing economy in the developed world.

And, of course, in some ways it is — but it does rather depend on what you choose to measure.

By this traditional, long-established yardstick, it is grim. The harsh fact is that the past five years have seen an astonishing decline in Britain’s overall trade performance so that in 2014 the deficit amounted to 5.1% of GDP — easily the worst performance since records began.

In fairness, the UK has only once in living memory generated a surplus on traded goods, which was just after North Sea oil started flowing in earnest in 1984. But our foreign income covers the hole most of the time.

For example, in 2005 the deficit was only 1.2%, easily covered by our earnings. But not any more.

So what has gone wrong? Obviously our export performance is weak and has been so for some time — partly because of the weakness of the eurozone, where most of our goods go — but more because we don’t actually make much stuff these days that the rest of the world wants to buy.

We have a few British-owned world-class manufacturing businesses with deeply embedded scientific expertise such as Rolls-Royce, Bae Systems and the pharmaceutical companies.

We have some world-class brands that people covet, such as Burberry.

We are good at creative, software, health and education.

But we do not have enough of these, they are not big enough, and they struggle to hold a position on the world stage.

Business Secretary Sajid Javid says he intends to preside over a huge surge in exports — those at the sharp end remain mystified as to how this is likely to happen.

But that is not what has set the alarm bells ringing because in truth we long since ceded to Germany the mantle of leading European exporter.

We will not get that crown back at least until our Government provides German-style long-term support for business exporting at home and overseas and is willing to provide the necessary finance. And our Government does not believe in that sort of help.

Rather, the problem is an alarming and unprecedented decline in the income from what is called Foreign Direct Investment (FDI).

This is the money we earn on British-owned businesses abroad minus the profits sent to overseas owners of foreign-owned businesses located here — the likes of Jaguar Land Rover, Heathrow, Asda or Cadbury — none of which are in British hands any more.

The Office for National Statistics last week released a paper that showed just how dire the situation has become.

The amount of credit generated by our overseas investments fell 31% between 2011 and 2014 to £73 billion. At the same time, the amount sent to overseas owners of British-based assets went exactly the opposite way.

It rose 31% to £71 billion. The overall effect of the plunge in money coming in and the surge in money going out was to cut out FDI surplus from £54 billion in 2011 to £2 billion in 2014.

“This is the lowest level on record,” the ONS reported.

Two things seem to be going on. First, we are making less money on our overseas assets while foreign owners here seems to be making more.

Second, the total value of our overseas assets has slipped fractionally in the four years to just over £1200 billion while the value of UK assets held by foreigners has soared from £1000 billion to very nearly £1400 billion.