Article

While economic debate in the UK continues to be dominated by government borrowing and living standards, policymakers are paying insufficient attention to Britain's position in the global economy.

Here, we really are living beyond our means - and have been for the last three decades.Official figures for the first three quarters of the year show that 2013 is set to be the 30th consecutive year in which the UK has recorded a deficit on its current account balance.

Current account balance (% GDP)

Source: Office for National Statistics Note: figure for 2013 is for first three quarters

These deficits have been financed by selling assets to overseas buyers. As a result, large swathes of British industry and infrastructure are now in foreign ownership. This can be positive for the economy. When overseas firms invest in new productive capacity or rescue firms destined for bankruptcy, they are creating or saving jobs - the role of Japanese firms in revitalising the British car industry is a good example of this. In other cases, however, such as Kraft's takeover of Cadbury - which was followed by the closure of a factory that it said it would be kept open - the benefits are less clear.

It is impossible to say how long Britain can sustain this position. As yet, there are no signs that foreigners' appetite for British assets is waning. But if we do not reinvigorate our export industries, at some point in the future we will find financing the current account deficit more difficult. At this point we will have to cut imports back sharply, which will only happen if the economy is pushed into recession. In other words, the current economic recovery is sustainable only if it is accompanied by a marked improvement in the UK's trade gap.

Within the last thirty years, only in the mid-1990s - when our trade performance was boosted by the 20 per cent devaluation of sterling after the pound was ejected from the European exchange rate mechanism - has there been an export-led improvement in the current account balance. However, sterling also fell sharply in 2007 and 2008, and by slightly more than in 1992, and this has so far failed to have an impact on the current account; in fact, deficits have grown bigger.

In his March 2012 budget, George Osborne said: 'We want to double our nation's exports to one trillion pounds this decade', with subsequent government statements clarifying that this meant by 2020. Exports are some way off the trajectory needed to hit this target.

Exports in 2011 were £493 million. That meant annual growth of 8.2 per cent was needed between 2011 and 2020 to achieve the £1 trillion target. But figures released today show that exports grew by only 1.7 per cent between 2011 and 2013, when they totalled £501 million. As a result, the annual growth rate needed if exports are to reach £1 trillion by 2020 has increased to 10.4 per cent.

Source: Office for National Statistics

In the decade to 2008, when - for the most part - global demand increased at a rapid pace, UK exports grew at an annual rate of 6.3 per cent. With most experts expecting more modest growth in global demand in coming years, a considerable improvement in the UK's export performance is needed if exports are going to come anywhere near reaching £1 trillion in 2020.

Even allowing for the crisis in the eurozone, which has affected demand in our major export markets, the sluggish growth in UK exports over the last two years is disappointing. It suggests Britain does not have the capacity in the right industries to take advantage of the increased competitiveness that results from a fall in sterling. Improving our export performance, therefore, requires the government to adopt an explicitly pro-export industrial strategy to maximise the opportunities for what remains of our manufacturing sector while developing new strengths in the export of manufacturing and services, including in the creative industries, education and the information economy.

UK governments have a poor historical record when it comes to supporting exporters and we need to learn from other countries that do things better. David Cameron talks about Britain being in a global race, but his government's failure to place exports at the heart of an active industrial policy has handicapped our exporters.

The government has strategies for those sectors of the economy that have been identified as existing strengths, including the aerospace and automobile industries. But they are not large enough to generate the exports that we need. New competitive advantages need to be developed. The government should identify industries where Britain can develop a competitive advantage and where there is a good prospect of strong growth in global demand in coming years and it must back these too.

The precise measures required will vary from industry to industry, but are likely to include help with finance, innovation and infrastructure. One area where there is general concern across industry is skills. In particular, the manufacturing industry has identified a shortage of young people trained in science, technology, engineering and mathematics (the so-called STEM subjects) as something that could hinder export potential in the future. Immediate steps are needed to upgrade the status of engineering in schools, and to offer more careers advice and guidance to highlight opportunities in engineering.

Firms must help themselves too. Successful exporting countries have strong business groups that work together and alongside embassies and trade organisations to develop a presence in export markets, in particular in emerging markets where links might not otherwise be strong. Large firms in the UK need to follow their lead.

Small businesses face additional problems breaking into new markets, particularly emerging markets. These are where the biggest opportunities are likely to be, but also where the greatest barriers - in terms of culture, language and protectionism for example - are found. Small firms need to be taught how international trade works, including the legal aspects of new markets and trade finance; they need the uncertainties reduced, including about whether they will get paid or not; and they need help managing currency fluctuations.

UKTI does much good work in these areas, but the UK's poor export record shows that more effort is needed. It should take a more proactive role, working with embassies to identify export possibilities and seeking out firms in the UK that can take advantage of them. Many small firms simply do not have time to identify good opportunities, but will react positively if they are brought to them.

Without more government support, businesses will not be able to boost exports sufficiently to meet the government's target of £1 trillion by 2020 and to close Britain's trade gap. The government needs to worry about the country's current account deficit, not just its fiscal deficit. If Britain is to stop living beyond its means in the global economy, it needs the government to develop an export-oriented industrial strategy - and the sooner it does so the better.

With thanks to Tony Dolphin, who co-wrote this piece.