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Holding down the value of the pound should be central to the UK’s post-Brexit economic policy framework – Roger Bootle and John Mills

  • The recent weakness of sterling has been extremely good news for the economy and should be maintained
  • The overvaluation of the pound has been damaging British export-dependent industries for decades
  • Policymakers should focus now on ensuring that sterling continues to trade at a more competitive level

The government should embrace the post-referendum fall in the value of the pound and adopt a new exchange rate policy designed to keep sterling competitive in the years ahead, two leading economists argue in a new Civitas pamphlet published today.

Roger Bootle and John Mills say that the pound has ‘long been stuck at much too high a level’ and that this bears much of the responsibility for economy’s ills, such as the decline of manufacturing and poor productivity growth.

‘Many people in the market and much of the commentariat are currently concerned with the recent weakness of the pound on the exchanges,’ Bootle and Mills write.

‘They are barking up the wrong tree. The real sterling crisis is that the pound has been too high. Accordingly, the Brexit-inspired bout of sterling weakness was extremely good news for the British economy.

‘Far from panicking about the lower pound, the UK authorities should be concerning themselves with the question of how they can ensure that the pound continues to trade at a competitive level in the future.

‘The exchange rate of the pound is vital to the success and health of the UK economy and the fact that it has long been stuck at much too high a level bears much of the responsibility for the economy’s current ills.’

In The Real Sterling Crisis: Why the UK needs a policy to keep the exchange rate down, Bootle and Mills argue that the UK has suffered acutely from exchange rate ‘misalignment’ due to its neglect as a policy variable over the past quarter of a century.

This has restricted exports by making them more expensive and stimulated imports by making them cheaper; it has therefore been a leading cause of the UK’s large current account deficit.

‘There has been a deep-seated tendency for sterling to settle at too high a level for the health of the UK economy,’ they write.

‘The results are devastating. On the financial side, persistent current account deficits undermine the country’s financial future. The UK is now a substantial net debtor. Excessive borrowing would be bad enough but the UK has increasingly sold real assets.

‘The result is that not only is the present borrowing from the future, but there is also a loss of national control over important parts of the economy.

‘This weak external position particularly affects our manufacturing sector, bolstering the forces making for its decline as a share of GDP.

‘This then diminishes our prospective rate of productivity growth (since productivity growth is stronger in manufacturing than services), intensifies the problems associated with employing lower skilled workers, increases inequality, and accentuates the regional divide.’

An economic policy that accorded a much greater role for the exchange rate would potentially bring significant benefits. However, the G7 forbids the deliberate manipulation of exchange rates to gain competitive advantage.

Nevertheless, there are ways in which the UK could adhere to its formal G7 commitments while effectively pursuing a policy that puts the maintenance of a competitive exchange rate centre-stage, Bootle and Mills argue.

These include putting less reliance on a policy of high interest rates. Continued fiscal stringency plus use of the Bank of England’s Prudential Policy toolkit offers a way of doing this. In addition, measures could be taken to make UK real assets less attractive to foreigners.

Bootle and Mills write: ‘With the British people having voted to leave the EU, this is an ideal time for the British government to pursue an alternative policy framework. Indeed, setting a policy that would establish and maintain a competitive exchange rate for sterling is the single most important thing that a government can do for the promotion of a prosperous Britain.’

Notes

Roger Bootle is one of the City’s best-known economists and chairman of Capital Economics, one of the world’s largest independent economic consultancies, which he founded in 1999. He is a specialist adviser to the House of Commons Treasury Committee and a former group chief economist of HSBC.

John Mills is an entrepreneur and economist with a life-long background in the Labour Party, leading to him becoming its largest individual donor. He is chairman of John Mills Limited (JML), a consumer goods company based in the UK but with sales throughout the world.

The Real Sterling Crisis: Why the UK needs a policy to keep the exchange rate down is published by the cross-party think tank Civitas: Institute for the Study of Civil Society on Friday 16th September, 2016.

Roger Bootle is one of the City’s best-known economists and chairman of Capital Economics, one of the world’s largest independent economic consultancies, which he founded in 1999. He is a specialist adviser to the House of Commons Treasury Committee and a former group chief economist of HSBC.

John Mills is an entrepreneur and economist with a life-long background in the Labour Party, leading to him becoming its largest individual donor. He is chairman of John Mills Limited (JML), a consumer goods company based in the UK but with sales throughout the world. 


The Real Sterling Crisis

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