The present return to modest growth in the United Kingdom is built on very shallow foundations. Net investment per head of the population has dropped to virtually zero, which goes a long way towards explaining why there is no increase in productivity. The UK does not have enough to sell to the rest of the world because we now manufacture so little. Partly for this reason and partly because we now have both negative income from abroad and rising international transfer commitments, we have a balance of payments deficit running at about 5.5 per cent of GDP, one of the highest in the developed world. In consequence both government debt and our national net asset position are deteriorating. On top of all this, the very low interest rates and asset inflation which are fuelling the current increase in GDP are unsustainable.
A Labour government coming to power in 2015 is thus going to face daunting problems as the present spurt of growth peters out. If economic policy continues broadly as it is at present, even if softened by Labour round the edges, there is every likelihood that there will be little of no growth between 2015 and 2020. If this happens, incomes and public expenditure will stagnate whatever is done with taxation and subsidies, unemployment will stay at levels which are much too high and society will drift towards increasing inequality. This is no recipe for a successful Labour government.
What can be done? The root problem with the UK economy is that at present all the activities which we most urgently need to get our economy rebalanced are hopelessly unprofitable. We desperately need more investment, a stronger industrial base and a better net trade – exports minus imports – performance but no one is going to put money into these parts of our economy if they cannot make any money by doing so. The reason for this state of affairs is that the UK cost base – all the costs that go into production apart from the roughly one-third which are imported – is far too high. This is very largely an exchange rate issue. Sterling is grossly overvalued compared to the currencies of the countries to which most of our manufacturing has moved.
The problem is that the remedy is a much lower pound, but no political party is going to go into a general election promising a massive devaluation. Too many people like their cheap holidays abroad and enjoy all their goods imported from China. The City likes a high value for sterling because it gives financial transactions more international leverage. We have all been brainwashed for decades by the terms we use – a strong pound is better than a weak one and seeing it go up must be better than watching it go down. The trouble is, however, that policies to keep the sterling as high as possible, based on these perceptions, lead to collapsing industry, not enough exports, no growth and stagnant incomes.
So what could Labour do? Maybe the best tactic is not to make any decisions before the May 2015 general election while keeping all options open, but to wait until there is a Labour government in power before deciding what to do. Then, however, faced with all the data which will then be available, a judgement will have to be made. Is our government going to take adopt the bold course involved in going for a lower exchange rate, which will have every chance of getting the UK economy back on track well before 2020? Or is it going to play for safety and stick with the austerity policies which have brought us to the present pass? This will undoubtedly appear to be the less risky option in the short term, but its medium to long-term consequences would be dire.
John Mills is chair of JML. He will be speaking at Progress annual conference on Saturday
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