The UK economy is not in good shape. We invest a lower proportion of our GDP every year than almost anyone else, which is the main reason why our productivity is almost static. We have deindustrialised to a point where we do not have nearly enough to sell abroad to pay for our imports. We have a chronic balance of payments problem financed by selling assets and borrowing from abroad. As a result, both as individuals and as a nation we are getting deeper and deeper into debt. What growth we have is driven by consumption, financed by asset inflation rather than by exports and investment. On almost every measure, inequality is growing.
There is a simple answer as to why we have these imbalances which have locked half of our population into static or falling living standards: for decades, the UK has had an over-valued exchange rate, which has slowly bled the life out of the economy’s ability to grow.
Here’s why this has happened. With the exchange rate where it has been – and still is – it is simply uneconomical to base light industry in the UK. This is why manufacturing has fallen as a percentage of GDP from almost one third as late as 1970 to less than 10pc now. In 1950, 23.0pc of world manufactured exports came from the UK. Now the ratio is 2.3pc – 90pc less.
Uncompetitive exports have led not only to falling sales abroad but to slower domestic growth as well. The UK economy has consistently grown at about 2pc per annum less than the world average. This may not sound much a year at a time but over a 50-year period if makes a massive ratio difference of 270pc. Every year since 1985, we have had a balance of payments deficit. This sucks demand out of the economy which has to be replaced by either borrowing or sales of assets – and the UK has gone in for both on a major scale unmatched anywhere else. To finance a standard of living we have not been earning, we have sold our ports, our airports, our football clubs, our power companies and utilities, our rail franchises, most of what manufacturing companies we have left and a vast amount of property.
To prop up our economy, we have borrowed money on an almost unimaginable scale. The monetary base in the UK has increased since 2000 by an almost unbelievable 1,000pc, storing up potential trouble in the future. The government deficit – largely a mirror of the equivalent balance of payments shortfall – is still running at some £80bn a year. Austerity programmes are never going to put this right. The only realistic way to do so is to sell more abroad to close the balance of payments gap.
But how is this to be done? The answer is that we have to have an exchange rate which makes at least a reasonable amount of manufacturing viable again in the UK – delivering probably about 15pc of GDP. Not as much as around 20pc in Germany or Japan because we have a very strong services export sector, with a surplus of about 5pc of GDP to make up the difference.
We have major natural advantages in services – our geography, language, legal system and universities. Unfortunately, services are much more difficult to sell overseas than goods, so we will never close our foreign payments gap without selling more manufacturers where we have no natural advantages – only undercapitalised factories and not very well trained workers.
This is why the only way we are going to get the economy rebalanced is to have an exchange rate which is low enough to get manufacturing industry back on its feet again allowing for its weakened state. Careful calculations that this would require a consistently held exchange rate of about £1.00 = $1.00 or €0.90.
Would this work? All the evidence from countries round the world which have started with nothing except low cost exports indicates that it would. There is no reason why we could not then get our growth rate up – whatever happens to Brexit – to 3pc or 4pc per annum on a sustainable basis.
Will this happen? Sooner or later it will. Our present trajectory is unsustainable. The crucial issue is whether we will have the wisdom to rebalance our economy while it is still relatively stable, or whether we will fight on with the pound far too strong until, in the end, confidence collapses. Not even we can go on walking on water for ever.
Britain’s Achilles Heel: Our Uncompetitive Pound, by John Mills, is out now