A weak pound is good for British industry

Far from being an economic disaster, the recent post-Brexit fall in the value of Sterling signals a potential new beginning for Britain's declining industrial base, argues John Mills.

According to many, the recent post-Brexit falls in the value of Sterling are a complete disaster. They signal that the UK is in imminent danger of total economic collapse. But what the commentariat avoid telling us is that for decades we've been saddled with a currency so overvalued that it has all but crippled our industrial base and lead to an economy almost totally reliant on the service sector.

It's worth remembering from the outset of any discussion on the UK economy that we've been in a dire state for a good number of years. We invest much too little of our national income, which is why productivity is static; we have deindustrialised to a point where we cannot pay our way in the world; we have chronic balance of payments problems which are only financed by selling off UK assets and borrowing from abroad at unsustainable rates.

We are running up debts much faster than our capacity to service or repay them, which crowds out investment and depresses confidence; but meanwhile we are propping up demand with ever larger amounts of debt as a result of policies which, like a drug, are becoming increasingly ineffective the more they are used.

This is not a good place to be for any developed economy.

But the good news is twofold: first, we have a new Prime Minister who appears to take the future of industry and manufacturing seriously, and has called for 'a proper industrial strategy'. Secondly, at long last, we have a currency moving towards a level on the world markets that will allow our manufacturing companies to increase sales and exports abroad and regain their competitiveness globally.

There is an overarching reason why the UK economy is so unbalanced, why wages and living standards for most people are static and why many of the trends that our economy exhibits are unsustainable. We are living in a fool's paradise because we have misjudged the significant influence of both our exchange rate and our competitiveness in determining our position in the world. We have not focused on the effect this has on our relations with the economies with which we trade and with which we have to compete.

But now we have the opportunity to transform our economic fortunes by developing a robust industrial strategy and implementing policies to manage Sterling for the benefit of our manufacturing base. If we did decide to take a more active approach to keeping Sterling lower, what would be the benefits?

First, the economy would be rebalanced. The opportunities for investment in manufacturing would push the proportion of GDP devoted to investment up, and the improvement in the balance of payments position that a lower pound would achieve would enable the state to match higher private sector investment with increased spending on our physical social infrastructure – hospitals, schools, housing, road, rail etc.

Deindustrialisation would be reversed as manufacturing as a proportion of GDP, rose towards around 15 per cent – the level it has to achieve to enable the UK to pay its way in the world. Much better net export performance – exports minus imports – would bring the balance of payments deficit down to manageable proportions. We do not need a surplus but we do need to ensure that the deficit as a percentage of GDP is less than the growth rate, to ensure that our overall position is not deteriorating. The rate at which debt generally was accumulating would again fall to below the growth rate, which is the condition needed for sustainability. Growth would be driven not by rising consumer demand but by investment and net trade.

The revival of manufacturing would enable us to start taking advantage again of the big productivity increases that light industry more than any other sector of the economy is capable of achieving. Prosperity would be spread throughout the country rather than being concentrated in the South East. Hope would revive in the parts of the country which would now be able to benefit from the upsides of globalisation rather than its downsides.

Why don't we do it? The main reason is that, for a whole variety of historical and cultural reasons, we are wedded to the mistaken idea that the stronger the pound is the better, and that undoing this condition is impossible. This is not the case. It can be done and we ought to do it.