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Out of balance

Peter French says the country’s financial situation has been running out of control with the effects about to hit home hard and advisers should be considering changing their clients’ investment strategies

For years, I have been banging on about UK plc overspending and failing to pay its way. I have said that sooner or later, it will have to stop spending money it has not got, living beyond its means and paying for everything on credit.

Our balance of payments gone from a surplus 10 years ago to 60bn a year and rising. Only the output of banking and related financial and business services has saved us from total balance of payments disaster.

The UK has been borrowing like there was no tomorrow. We have been spending and selling off assets, only to be used to pay for imports, as though money was going out of fashion.

Sales of UK assets abroad probably exceeded 100bn last year, which was well in excess of the UK invested abroad. On both capital and trading accounts, the UK spends more abroad than it earns and sells more UK assets than it spends on buying foreign assets. It cannot go on for ever.

The problem now is that, having sold everything to pay for our consumption binge, which has given rise to a feelgood factor that has kept Gordon Brown and Labour in the nation’s good books for 10 years, this is about to change.

The Government and consumer spending spree must be paid for. Now there is probably not too much left to buy in Britain by way of attractive, reliable earnings’ businesses like our airports, water, electricity, public services, etc, the demand for sterling by foreigners to buy UK assets and invest in UK property is likely to slow down.

Meanwhile, because all our manufacturing has been closed down, our output of traded goods has fallen calamitously. The unsustainable balance of payment deficit only balances, as long as we sell off assets. What started as a foolish exercise under Margaret Thatcher of privatising everything in nice bite-sized pieces ready for takeover bids (but only if the takeover bids were from foreign companies) has become a mad rush by foreigners to buy up the UK.

The cost comes later when foreigners want to repatriate the dividends on the investment.

What is worse, as so many of the takeovers have been financed on debt where the cost of financing has been tax allowable, removing the corporation tax take, means the Exchequer loses as the profits from these, now foreign-owned, enterprises make no contribution to the UK tax coffers.

The extra million public sector jobs created by the Government have effectively been financed by borrowing and sales of our assets abroad.

We are now seeing the end game. The pound as well as the dollar are showing signs of weakness against the euro. This inevitably increases prices of imports. Gas and oil, in which we were once self-sufficient, will become a major import cost. Renewed inflation is inevitable.

In trading terms, the pound has been overvalued for years. This has driven much of the UK manufacturing sector out of business. When, not if, we see the devaluation, it will happen suddenly. If the Bank of England reacts by raising interest rates in a vain attempt to reduce inflation, it is a plan that will fail. Inflation would be inevitable within the next two years as this scenario unfolds and true living standards fall.

Any increase in interest rates to 8 per cent, as Martin Weale of the National Institute of Economic and Social Research is calling for, precipitates a disaster and does nothing to repair the damage which is unfolding which I have been forecasting for years. All that will do is to bankrupt a million people.

Whose fault is it all? It is partly the terrible legacy of the destructive way that Margaret Thatcher went about selling public assets. Partly the irresponsible way that our financial institutions sold off shares to foreign owners, partly the original owners who sold their shares to finance foreign goods and holidays.

The tragedy of oil and gas which caused the pound to soar in the early 1980s was that it rendered huge areas of UK manufacturing uncompetitive over a period of, say, two years. Hence, the closure of UK manufacturing, an experience not seen anywhere else in the world. The UK is simply not paying its way in the world by any yardstick

The next Chancellor and Government could be Conservative and
the mess they will have to solve is frightening.

At some time, we are going to have to earn our living in the world and pay our way. Selling off assets to pay for consumption cannot last. Releasing money from our homes to spend on imported cars and foreign homes is not sustainable.

If we are to pay our way in the world today, we have to trade. That is we have to sell goods and services to a value which match our imports. Any difference can only met by living off investment income and selling off assets. We have been doing the asset-selling for too long. City earnings may be making up some of the difference.

Financial advisers have the task of advising clients about their pensions, investments savings and mortgages. Are we sleepwalking clients to disaster? Should we be disinvesting from fixed interest like mad as inevitable inflation make the Bank of England react and pushing interest rates to 8 per cent?

Should we tell clients to take fixed-interest deals on mortgages, grabbing them while stocks last, then, not to spend the proceeds on a foreign car but to invest in foreign currency? Should we bale out of UK assets into Euro assets?

Already we are seeing an outflow of big international companies leaving the UK as costs and taxes are becoming internationally uncompetitive.

There is no certainty that the inevitable fall in sterling will make the UK economy eventually more competitive but the painful readjustment might be very drawn out. It will need a superhuman effort by a new Government which will need to sell an austerity and economic reconstruction programme to a UK which will not accept kindly, the sacrifices which are inevitable.

The UK has now gone ex-growth, that is if the apparent economic growth under Labour was ever a reality rather than statistical misinformation.

My pension is invested in mainly non-UK investments. That is how I have reacted to my fears for UK plc.

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