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August 29, 2014 - Latest:

De-value the pound and kick-start the UK’s economy says think tank

  • 30 April 2013

Sterling is crippling British industry and should be devalued by a third to boost the economy, says an independent think tank.

The strength of the pound is a key factor behind UK’s huge trade deficit, which is in turn the root cause of most of the difficulties currently besetting the economy, argues Civitas as Philip Scott reports.

In ‘An Exchange Rate Target: Why we need one’, entrepreneur and economist John Mills says the pound should be reduced to about $1.05, or €0.80. It is currently about $1.50 or €1.17. The UK’S latest GDP figures showed that Britain’s meagre growth in the last quarter was down to the services sector. Manufacturing, by contrast, has continued to decline, shrinking in three of the past four quarters.

Mills says: “Maintaining a strong pound over many years has sucked demand out of the economy because we buy more goods from abroad than vice versa. This causes high long-term unemployment and welfare dependency while driving up public and private debt as we have to borrow to finance our over-consumption. There are realistic alternative policies to those being pursued at present, and we very urgently need to adopt them.”

He argues getting the exchange rate right is a more important goal than inflation-targeting. “There are no solutions to our current problems other than increasing our competitiveness and paying our way in the world,” he writes.

Allowing the economy to operate at full capacity would help get the UK back into growth, tackle unemployment by creating jobs, reduce the welfare bill and help reduce inequalities in wealth, Mr Mills says.

The current account deficit is about £65 billion a year. The last trade surplus was in 1982. The only way to reverse that trade deficit, Mr Mills says, is to sell more goods to the rest of the world. There is a £100 billion deficit in manufactured goods because the strong pound means it costs much more to make almost anything here than in many parts of the world, he notes.

“The only policy which will remedy these problems is to get the UK cost base down to a level which will make it possible for us to re-establish enough manufacturing capacity to enable us to compete in the world,” Mills says. “To do this, some fairly simple calculations show that we need to get the pound down by about a third from where it is now – to around $1.05 or €0.80. The UK balance of payments would be in much better shape following a devaluation although it would take two or three years for the full benefit to come through, because export volumes take longer to respond to price changes than imports.”

Mills acknowledges the move would be a wrenching change for policymakers insists that such a move would not create more extra inflation, nor would it lower living standards and he believe it is very unlikely other countries would retaliate to such a strategy.

In the Civitas publication’s foreword, Civitas director David Green backs the view that the pound should be allowed to fall in value. He says: “Demand for the pound has been kept artificially high because we have been selling off our businesses and high-end residential properties to overseas owners and selling government bonds to non-UK residents. This extra demand for our currency has tipped the balance against our manufacturers, despite the massive and sustained improvements in productivity they have achieved in recent years.”

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