An Exchange Rate Target: Why we need one, by John Mills
The pound should be devalued by about a third to unleash British manufacturing and allow the UK to once again pay its way in the world, a new pamphlet published by the independent think tank Civitas argues.
The strength of sterling is a key factor behind Britain's huge trade deficit which is in turn the root cause of most of the difficulties currently besetting the economy.
In An Exchange Rate Target: Why we need one, entrepreneur and economist John Mills demonstrates how a weaker pound would alleviate Britain's problems by making exports much more competitive.
He says the pound should be reduced to about $1.05, or €0.80. It is currently about $1.50 or €1.17.
Maintaining a strong pound over many years has sucked demand out of the economy because we buy more goods from abroad than vice versa. This causes high long-term unemployment and welfare dependency while driving up public and private debt as we have to borrow to finance our over-consumption.
The current account deficit is about £65 billion a year. The last trade surplus was in 1982. The only way to reverse that trade deficit, Mr Mills says, is to sell more goods to the rest of the world.
There is a £100 billion deficit in manufactured goods because the strong pound means it costs much more to make almost anything here than in many parts of the world.
"The only policy which will remedy these problems is to get the UK cost base down to a level which will make it possible for us to re-establish enough manufacturing capacity to enable us to compete in the world," he says.
"To do this, some fairly simple calculations show that we need to get the pound down by about a third from where it is now - to around $1.05 or €0.80.
"The UK balance of payments would be in much better shape following a devaluation although it would take two or three years for the full benefit to come through, because export volumes take longer to respond to price changes than imports."
Mr Mills acknowledges the move would be a wrenching change for policymakers but tackles common misconceptions about the idea head on, setting out why it would not create more inflation than would occur anyway, would not reduce living standards and is very unlikely to cause other countries to retaliate.
He says getting the exchange rate right is a more important goal than inflation-targeting. "There are no solutions to our current problems other than increasing our competitiveness and paying our way in the world," he writes.
Allowing the economy to operate at full capacity would help get the UK back into growth, tackle unemployment by creating jobs, reduce the welfare bill and help reduce inequalities in wealth, Mr Mills says.
"The fundamental reason for our economic problems is that we live in a country which has had steadily increasing difficulties in paying its way in the world. This manifests itself as a balance of payments deficit year after year," he says.
John Mills is chairman of John Mills Ltd, an import-export and distribution company, vice-chairman of the Economic Research Council and secretary of the Labour Economic Policy Group.
Civitas: Institute for the Study of Civil Society is an independent social policy think tank that facilitates informed public debate on important issues of the day. It receives no state funding and relies entirely on voluntary donations. Details of how to become a member or make a contribution can be found here.