Time for an alternative to the pro-austerity consensus

The conventional assessment is that the UK economy is in reasonable shape. Indeed, there has been some growth in GDP over the last year or two and unemployment has fallen.

A harsher view – developed in detail in a book being published in March 2015 by Random House called Call to Action, written by myself and former Labour shadow minister Bryan Gould – is to note that average living standards are still well below what they were in 2007. The proportion of GDP which we invest is so low that productivity growth has ground to an almost total halt. We have deindustrialised to a point where we have not been able to pay our way in the world since 1985. Our balance of payments deficit – now at 6% of GDP the highest in the developed world – is getting unsustainably high.  

We have a population which is expanding at about 500,000 per annum, diluting down our growth rate and our social capital because we are not investing nearly enough to stop this happening. The government deficit is stuck at about £100bn a year, adding about 3% of GDP to the national debt every year; and that what growth we have had has largely been based on consumer spending driven by unsustainable asset inflation.

Against this background, it is hard to believe that the growth we have had over the last couple of years is going to be sustained – and even less likely that living standards are going to rise. Instead, it seems much more probable that increases in GDP will be shared out among a population which is rising every year by the number of people living in Nottingham, leaving them below the 2007 level all the way through to at least 2020.  Can we really not do better than this?

We can. But to do so we need to adopt a radically different economic policy. The key problem in the UK at present is net of depreciation; there is virtually no investment taking place in the section of our economy – light industry – which is best capable of producing high returns and rapid increases in productivity. The reason is that the UK cost base – all the costs incurred in sterling which are associated with manufacturing – is way above what it is in other parts of the world, particularly in the Pacific Rim. This is entirely an exchange rate issue. Sterling is far too strong for most medium or low tech industries to survive.

Does this matter? Yes, it does. It means not only that we forego the best opportunities for productivity increases, and all the good blue collar jobs that go with them, but we also finish up with too little to sell to the rest of the world to pay for our imports. The consequent balance of payments difficulties force us into deflationary policies, low growth and unemployment at much higher levels than it needs to be.

If we want to get out of this bind, some careful calculations – all set out in our book Call to Action – show that we would need to bring the exchange rate down by about 30% from where it is now – to around £1.00 = $1.10 or €1.00. The consequent export and import substitution led growth would then see manufacturing as a percentage of GDP rising from 10% to 15%, the UK economy expanding on a sustainable basis by 4% to 5% per annum, unemployment falling to about 3%, investment as a percentage of GDP rising from 14% to somewhere close to the world average of 24%, while living standard rise significantly every year.

Why don’t we do it? Because a lot of people believe a whole range of things about the exchange rate which are not true. They believe that devaluation causes inflation, but history shows that it doesn’t; they think that governments cannot change the exchange rate but there is plenty of evidence that they can; they think there would be retaliation, which actually is very unlikely but manageable even if it occurred; they think that lowering the exchange rate must make us poorer, but the reverse is true; they claim that we have tried devaluations in the past and they don’t work whereas the reality is that we have always devalued to little and too late, never making the economy competitive enough; finally they believe – against every shred of evidence that is available – that people in Britain would not respond to new profitable opportunities if they were available.

Of course going for growth based on a manufacturing revival presents some challenges. No policy is completely risk free. But there are also huge risks with staying as we are. What are the prospects for Labour going to be like in the future if a Labour led government between 2015 and 2020 presides over another five years of static or declining living standards, relentless cuts in expenditure, rising inequality and relative if not absolute economic decline?

‘Call to Action’ will be launched at the Royal Society of Arts at 6.30pm on Monday 16th March. Admission is free, you can register here: http://call-to-action.org.uk