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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.”

Photo: Getty Images
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.