I admit many Conservatives may not like the message in this article. It will sound like I’m asking the Government to get too involved in our free market. Even that I’m asking the Government to pick winners, or increase the state’s reach into new areas of business.
I may be a long-time Labour supporter, but I have a lot of respect for one Conservative principle in particular – sound money, the aspiration to run the economy in a balanced way.
My new book, Why the West Is Failing, may be hard reading in places for the average free-market Conservative, but my message should resonate with them more than anyone else.
In the book, I outline how unless we get the UK economy growing again at something like 3%, it will be near impossible to balance the books ever again. The way to do this is through boosting our manufacturing industry. Right now, investment in our manufacturing industry simply isn’t profitable. We must make investment in manufacturing more attractive by getting the exchange rate down, ensuring investors come to us, instead of looking elsewhere.
The economy is looking worse by the day. We are sleepwalking towards a catastrophe of very high inflation and low growth. Far too many people are in insecure, low-paying jobs and simply can’t make ends meet. As it stands, we could see living standards continue to fall by as much as 10% over the next few years. Worse still, we have the huge costs of social care, climate change, and much else coming fast down the track.
How can we possibly hope to pay for all this and balance the books if we don’t see more economic growth? The economy is treading water, and it is only by driving up rates of growth from around 2% that we will be able to afford what the future holds.
When Liz Truss and Rishi Sunak obsess over whether to prioritise fighting inflation or cutting taxes in the next three months, they are focusing too much on the short term. They need to step back and recognise that the UK has suffered decades of low growth. This is not a new problem. And they need to have the confidence to be radical and make a real break from the past. They should be looking for a way out: a strategy to beat the issues we face today and prepare for those of tomorrow. Where is our ambition?
We are forced to choose between grossly overtaxing the economy on the one hand and triggering recession on the other. UK inflation is rising more than almost anywhere else while investment dries up. Our economic model is broken, but there is a way out.
By some accounts, 25% of all manufactured exports used to be British-made, but now that figure is as low as 2%. The fact that we have lost such a huge share of world trade is a clear sign of our lack of competitiveness.
Why is this important? Because it is much easier to drive GDP growth up with manufacturing than services. You can double the output of a single manufacturing plant by installing quicker, better machines, whereas it’s incredibly difficult to double the speed of a hairdresser. Our wilful dependence on services is holding us back.
We need to turn this around. We can be a leading manufacturer once again, not by trying to revive the industries of the past, but with a high-tech and modern manufacturing sector. Manufacturing has moved on from the days of ‘dirty and dangerous’ to become an industry rooted in high-tech products that we can be proud of.
But how do we get manufacturing going again? The key, as I argue in my book, is by adopting a much lower and more competitive exchange rate. We need to bring down the value of the pound to make our exports cheaper in world markets. We need to make the pound more competitive for manufacturers.
Our current exchange rate is the limiting factor for our manufacturing industry. Around 70% of the manufacturing costs of goods produced in the UK are paid for domestically, in pound sterling. By keeping the pound high, all these costs are charged out at too high a rate to make manufacturing in the UK competitive.
Our national obsession with maintaining the ‘strength’ of the pound is holding us back from taking this step. We need to have the confidence to be more radical. While import costs will go up if the pound becomes more competitive, this does not mean overall inflation will increase much, if at all. In fact, history tells us that generally, in these circumstances, price trends continue as previously expected (I cover the statistical record in my new book).
For as long as the Bank of England is mandated to keep inflation at 2%, the exchange rate will stay high, and investment in our manufacturing industry will be unprofitable. To compete for investment with other economies and spur growth, we must urgently change course.
Through a competitive exchange rate, we will grow the economy at a rate we have come to assume is impossible. A booming manufacturing sector will create high-wage, high-quality jobs across the country, helping drive the levelling up agenda. Indeed, the very reason we need that agenda is that we have deindustrialised too much over the last few decades. Previously prosperous manufacturing hubs, from Sheffield to Hull, have been hollowed out. It is high time we addressed these regional inequalities.
The economy will sit front-and-centre on the next PM’s desk. It will be the defining factor in their tenure, and they must get it growing. It is time we saw a leader who is ready to kickstart manufacturing-led growth. Not another follower who is willing to hide behind reactive, short-term economics. This is the key challenge for the next PM. It is time to be radical.
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