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The high cost of a strong pound

The Treasury's obsession with inflation is hurting the UK economy, argues a new Civitas report.

A strong pound has only benefitted bankers and is preventing exporters from pricing their goods and services competitively on global markets, according to a new report from the think tank Civitas. 

In the report, entitled A Price That Matters, the entrepreneur and economist John Mills argues that this has led to Britain’s languid economic growth. He shows that policies that ignore exchange rates and international competitiveness and focus only on inflation have contributed to the decline of manufacturing, stagnant incomes for many, entrenched regional unemployment and rising inequality.

Mills, whose background has mainly been in manufacturing techniques such as injection moulding, fabrication, metal pressing and assembly, says that without intellectual property protection, such industries would be “highly vulnerable to lower cost-base competition – which is exactly what has happened in the UK”.

Rival countries that have undervalued their currencies have experienced growth in their economies. The result has been a loss of jobs and a widening balance of the payment deficit between the UK and the rest of the world.

Mills added that the exchange rate policy pursued for decades by the Treasury and the Bank of England, which views inflation of around 2 per cent per annum as its target, has made it much more expensive to run most manufacturing operations in Britain than in other parts of the world.

Rather than targeting inflation alone, the government should also target international exchange rates and competitively devalue the pound relative to other world currencies, including the dollar and the euro, writes Mills. 

He estimates that a 10 to 15 per cent devaluation would be sufficient to close Britain’s trade deficit; a 20 to 25 per cent devaluation would return Britain to 4 per cent annual growth. 

Mills concludes with a warning that Britain will inevitably face a massive fall in the value of the pound in the future: “Getting the exchange rate down is a matter on which, in the end, we will have no choice. If we continue to run up huge debts which we cannot pay back, sooner or later we will run out of creditworthiness. There will then be a major currency crisis and the pound will crash. The choice we have is whether we get this done in an orderly manner while we still have time for this to be arranged, or whether we wait so long that we finish up with a disorderly rout.”

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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.