UK: Editorial - The battle for Britain.

UK: Editorial - The battle for Britain. - A second division currency for a second division country with a second division economy - that was the scale of the Government's climbdown as Britain withdrew from the European exchange rate mechanism (ERM).

Last Updated: 31 Aug 2010

A second division currency for a second division country with a second division economy - that was the scale of the Government's climbdown as Britain withdrew from the European exchange rate mechanism (ERM).

There are some bright spots in the British economy but if we remain in the second rank, Germany, as the leader of the premier league, will move sharply ahead, once the former east Germany has been sorted out.

The Government's monetary humiliation leaves it dangerously short of an economic policy. The ERM had the virtue of relative stability and squeezed out inflation faster than anyone had thought possible. But jacking interest rates up to 15% or even higher as the price for continuing membership of the European first division was beyond the British pain threshold.

So where now? With a clean sheet, the Government could start constructing an economically stimulating policy - what the country cries out for.

Given its horrendous public sector deficit of £30 billion-plus the idea of Britain adopting a Japanese (a £50 billion-plus stimulus) or Taiwanese (a £183-billion infrastructure plan) model is a non-starter - without adjustments to public finance.

As Management Today has been advocating, a public sector pay freeze, backed by a clamp-down on any increase in state benefits, is necessary. Public sector pay, at £70 billion, has been rising at about 10% a year in the last two years of negative growth. Savings here, backed by additional savings from streamlining state administration, could be added to revenues increased by raising VAT from 17.5% to, say, 20%. If the Government had the courage to abolish the absurd middle-class subsidy on mortgage income relief, several billion more pounds would be released. All this would create an infrastructure war chest to renew roads, railways, schools and training.

To give hard-pressed home-owners a break and compensate for increased VAT, interest rates could be brought down to at least six per cent. The housing market could be given a further stimulus if the huge balances held by councils from sales of their housing stock were used to buy up re-possessed homes.

For its part, the private sector would have the prospect of the wealth generated by the infrastructure stimulus, plus lower interest rates to help its battle for prosperity. The key would be to use the breathing space granted by devaluation to win export markets.

The great danger would be inflation, generated by increased domestic activity and the higher cost of raw materials, eroding competitiveness. The first should be contained, in the short term, by the huge amount of spare capacity in the economy. On raw materials, world recession is keeping prices low, but pressure would inevitably build up.

The Government would have to encourage private sector pay restraint to match the public sector. Government contracts for work on the infrastructure plan would be few and far between for firms paying excessive wages or awarding huge increases to directors. Perhaps the Cabinet could lead the way by taking a modest pay cut.

The one area where the Government should press on and put some beef into the anti-inflation message is in the ever-rising cost of services. Energies should be focused on any semi-monopoly trying to charge inflation-busting prices.

We've heard a lot about kick starts: how about these kicks - for starters?

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