Devaluation is the key to long-term growth – John Mills
Civitas, 25 March 2014
Civitas today publishes the latest in a series of pamphlets by John Mills, a respected economist and the highly-successful entrepreneur behind shopping channel company JML.
In it, he warns that the current return to growth is unlikely to last without a radical change of economic strategy, harnessing exchange rate policy to support domestic manufacturing and allow the UK to pay its way in the world once again.
Here is an extract from the introduction of ‘There Is An Alternative: An economic strategy for 2015’:
The next general election will be held in May 2015. No one can foretell the outcome. It is not so difficult, however, to forecast the more significant economic prospects and problems which will have to be faced by whichever party or combination of parties wins power. They are likely to be depressingly familiar and as apparently intransigent as ever.
Even if the current not very convincing growth momentum is sustained, living standards as measured by average Gross Domestic Product (GDP) per head are still likely to be below those prevailing as far back as 2007. The foreign payments deficit is trending towards being considerably greater than the £60bn plus expected in 2013, further increasing the indebtedness of the country as a whole. A gap as large as this on foreign payments is another reason why the recent return to growth is, as Bank of England Governor Mark Carney acknowledged in February, both unbalanced and unsustainable. Even by the time of the 2015 general election the UK’s economic recovery, and with it the deficit-reduction plans of the three main parties, may be looking more doubtful. Total government debt will then be approaching 100 per cent of GDP. While this ratio has been much higher in the past, especially after major wars, on these other occasions there was a growing economy to absorb all the accumulated debt, which may be lacking in 2015. The widening balance of payments and growing national debt may by then be beginning to sap the optimism generated by rising house prices, dampening both consumer and business confidence, so that the modest growth which we are currently experiencing may well have lost pace. With current policies in place, the more government action there is in the run up to the election to stimulate the economy to produce a ‘feel good’ factor, the more daunting the foreign payment deficit – and with it the pressure to raise interest rates – is certain to be once the election is over.
In addition, the incoming government in 2015 will have other familiar problems to face. The gap in incomes, wealth and every other measure of welfare both between the regions of the country and between socio-economic groups is alarmingly wide and shows little sign of narrowing. Manufacturing – and with it our main capacity for paying our way in the world – is likely to have shrunk further as a proportion of GDP to no more than 10 per cent – down from 32 per cent in 1970 and 24 per cent as late as 1980. Gross investment as a percentage of GDP – 13.5 per cent for the first three quarters of 2013, compared with a world average in 2012 of 23.8 per cent and 46.1 per cent in China – is unlikely to have improved much, if at all. Productivity per worker, up eight per cent in America since the crash, was down by five per cent in the UK at the end of 2013 and is unlikely to have picked up significantly by 2015. While the total number of people in employment, at close to 30 million, is at a record level, about eight million of those with jobs are only working part-time and there are almost five million other people of working age who are not working at all. At the same time, the number of people of retirement age is rising inexorably, precipitating the risk of widespread pensioner poverty as public expenditure becomes more and more stretched.
We are therefore facing a very unpromising future. Unless the economy can be made to grow on a sustainable basis, we have in prospect years of stagnation while most of the adverse trends described above continue to move in the wrong directions. Is there anything that can be done to avoid these outcomes, or are they inevitable? The answer is that there is an alternative policy which could be fully implemented within a five- year term and which could transform our prospects. It would, however, involve radical changes from the orthodoxy that has prevailed in the UK for far too long.