No wonder the government still refuses to commission an economic impact assessment of Brexit; the results would not reflect our exit agreement well.
Under these circumstances, it is perhaps surprising that the pound is not under more pressure in the currency markets than it is. So far this year, it has fallen more than 10% against the dollar, but it has remained broadly stable against the euro and has fallen only 3% on a trade-weighted basis.
There are still few signs of a full monetary crisis, where interest rates need to be raised precipitously to guard against the inflationary consequences of a collapse of the pound.
A large current account deficit does not necessarily matter if there are enough investors willing to finance it with capital inflows. But that leaves the country dependent on what Mark Carney, former Governor of the Bank of England, called “stranger friendliness”.
For the moment, there does not seem to be any particular problem in this regard, despite the increase in the interest rate differential with the United States. Anecdotally, there is still a long queue of overseas buyers looking to buy up UK companies, and even invest in UK government debt. Net investment in the UK increased by £158.9 billion in the first quarter.
Appetite for UK assets may be on the verge of collapsing, but that is by no means set in stone. Those who think that UK gilts are “sitting on a bed of nitroglycerin”, as self-proclaimed bond king Bill Gross said of them at the time of the financial crisis, should think about it; Britain is virtually the only one in the world that has never defaulted.
Theoretically more creditworthy countries such as the United States and Germany most certainly have, the latter massively on at least four occasions in the last century. This enviable and almost unique credit record is not something the UK Treasury is about to give up. Even if things go wrong, Britain will always pay its debts.
Nevertheless, looking at the latest balance of payments statistics, there are worrying straws in the wind that will eventually require huge and politically difficult policy changes.
Portfolio investment abroad fell by £103.6 billion in the first quarter, reflecting a fairly widespread sale of foreign stocks. This is equivalent to selling family silverware to finance everyday consumption and is clearly not sustainable indefinitely.
The ONS also struggled to reconcile the recorded current account deficit of £55.7bn with the £29.6bn net inflow. Since the balance of payments must, by definition, always balance, the deficit is listed as unexplained “net errors and omissions”.
Either the current account deficit is not as large as expected, or there is another source of possibly quite unstable inflow that is not being recorded.
Whatever the truth, the UK clearly cannot continue to run up current account deficits of this order of magnitude indefinitely, nor for that matter expect the rest of the world to continue to finance them – by no means so long that it remains a relatively high tax, a large state economy.
Taking back control also means taking back responsibility, and yet our Brexiting government does not seem to have understood this. The ruthless logic of Brexit is that of the small, low-tax state, yet we seem to be going in the opposite direction. Without correction, our current trajectory can only end in monetary crisis and bankruptcy.
To finance a trade deficit of the current size, and eventually rebalance it, you need to attract a lot of foreign investment. You don’t do this by jostling income tax, corporation tax and other forms of corporate taxation. Hopefully we won’t need another mega crisis for this stark truth to sink in.