Britain’s reliance on financial services spells trouble
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Version 0 of 1. The last financial crisis demonstrated the impact that global market turbulence can have on the UK economy. This time, it is worries over China’s slowing momentum that could have serious implications for British businesses and consumers and for George Osborne’s much delayed deficit reduction plan. British banks are particularly exposed to instability in China – recent figures from the Bank for International Settlements showed them holding a staggering 28% of all China’s overseas loans, more than those of any other country. In a worst-case scenario, if enough of these loans go bad it could have an impact not only on those banks’ profitability and share price, but also on their ability to lend in Britain. Figures from the Office for Budget Responsibility show that once again we are increasingly reliant on rising household debt, so without more savings or export-led growth – which the chancellor has made little progress with – the health of the financial sector to lend really matters. At present, these are risks to our recovery rather than a prediction of a new downturn. But the truth they highlight is that for all George Osborne’s rhetoric about “rebalancing”, we are still too reliant on financial services to offset our record deficit in traded goods, and too reliant on debt-fuelled consumption to support growth in domestic demand. And, of course, financial instability and slow growth will also affect the chancellor’s deficit reductions plans. Official figures released on Friday showed that in the first three quarters of this financial year the government has already borrowed more than it planned to borrow in the year as a whole – £74.2bn compared with the whole year forecast of £68.9bn. A surplus of more than £5bn would now be needed in the final quarter of this financial year to meet the chancellor’s targets. If that surplus doesn’t materialise, that means even more cuts and tax increases or further drift in the deficit reduction plans – already extended by five years. Just two months ago, Osborne used his autumn statement to boast about the “improvement in the public finances” that allowed him to U-turn on unpopular cuts to tax credits and policing while producing a plan that would leave Britain “ready for whatever storms lie ahead”. It is extraordinary how quickly those words have come to seem so incredibly complacent. None of this is to say that a full-scale banking crisis or recession is imminent or that Osborne’s luck has run out. But recent events are a timely reminder of the risks to Britain’s living standards and public finances from the chancellor’s failure to build the broader-based, better-balanced, more productive and more sustainable economy we all need. Rachel Reeves is Labour MP for Leeds West |