John Mills Exchange Rate
John Mills: Britain needs a far lower exchange rate

If we have a Labour government elected in 2015, our incoming Chancellor of the Exchequer is going to be faced with daunting economic problems – made worse by years of ineffective Coalition policies.

Two of the most intractable are going to be the twin declines which have taken place in both the UK’s investment ratio and the proportion of our GDP which comes from manufacturing.

In the 1990s, the UK’s gross investment as a percentage of GDP averaged around 20%. By the 2000s it had fallen to about 16%. For the first three quarters of 2013, it was 13.5%. Compare these figures to the world average which is 24%.  The figure for China is 46%.
While the gross position is bad enough, the net position is much worse. Depreciation of existing UK capital assets is running at just over 11% of GDP each year. This leaves net investment at about 2.3%.

With a growing population, however, all of this is taken up by the capital expenditure needed to avoid our existing assets per head of the population being diluted. Net investment per head of the UK population has therefore fallen to zero. Are you puzzled by the fact that productivity growth in the UK has ground to a halt? Zero investment in the future is surely a big part of the explanation.
Linked to the fall in investment is the collapse in the UK’s manufacturing base. In 1970, 32% of the UK’s GDP was manufacturing.  After haemorrhaging during the period of the Thatcher government in the 1980s and again when the exchange rate rose to dizzy heights in the 2000s, this ratio has fallen to barely 10%.

As 60% of our exports are goods rather than services and three quarters of all the goods we sell abroad are manufactures, we simply do not now have enough to sell abroad to pay our way in the world. In 2012 we had a deficit on manufactured goods of about £85bn. The last time we had a visible trade surplus was 1982. We have not had an overall trade surplus since 1983 – over 30 years ago.

Here is the problem, therefore, that our incoming Labour government in 2015 is going to have to face. With no net investment there is little or no hope of any increases in productivity being achieved on a sustained basis, and therefore little prospect for any rises in living standards occurring on a lasting footing.

With too little to sell to the rest of the world, there is going to be a constant balance of payments constraint on trying to expand the economy by either fiscal or monetary means. The result is going to be years of continuing stagnation, high unemployment, rising inequality, government deficits, rising debt and relative if not absolute national decline.

Why can’t we raise investment and improve our manufacturing competitiveness to get out of this bind? We might be able to do this if the economy was already growing but if it isn’t there is a huge problem. You cannot use the same resources both for investment and consumption. If we are to get our rate of gross investment up, we need to get living standards down to make the resources available. Who believes that this is a politically viable strategy?

Is there then no way out of this problem? There is a solution but it goes right against all the conventional wisdom. Here is what really needs to be done. We need a far lower exchange rate to make investment and manufacturing in the UK hugely much more profitable than they are at the moment.

We need to expand public expenditure and reduce taxation to make sure that the pound falls fast and far enough, both to increase living standards and to provide a stimulus for further investment.

We need to draw millions of people back into the labour force and to use the big increase in output thus achievable to raise our investment rate while still increasing living standards. To get all this to happen together, we will need to get the economy to grow at 4% to 5% every year.

Won’t this cause a big problem with the foreign payments and the government deficits? Yes both will widen temporarily but this doesn’t matter if, instead of a stagnant economy, we have one which is growing fast and which is therefore clearly going to be able to service and repay any additional borrowing which takes place.

Labour is therefore going to have a difficult choice. Is it going to stick to orthodoxy and preside over years of stagnation and decline? Or is it going to have to face down the economic establishment, and go for the radical growth strategy which we so badly need?

John Mills is Chairman of JML Direct




Significantly Lower Sterling Exchange Rate to Reinvigorate UK Growth
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