But how could a government encourage British exports and/or the substitution of domestic production for imports? One possible element in Labour’s thinking may be that by getting the UK closer to the European Union they will be able to negotiate a more favourable trade deal and thereby boost net exports. Good luck with that one.
In fact, there are better prospects across the Atlantic. If Donald Trump wins the Presidential election, there is a decent prospect of securing a US-UK trade deal which could have major beneficial consequences. But only if Labour could stomach both the process and the necessary concessions to the US.
Confronted with an endemic current account deficit, traditional economists would suggest that the exchange rate needs to be lower. And there are some aspects of a possible Labour macro policy that could send the pound lower. For instance, Labour could change the Bank of England’s inflation mandate by increasing the inflation target from 2pc to 3pc and/or by adding an economic growth objective.
Either way the markets would interpret the change as indicating that interest rates could be lower and inflation probably higher, thereby tending to lower the exchange rate. I don’t think that this is what an incoming Labour government should want and, accordingly, I suspect that it would not go down this route.
Another possibility is the establishment of a sovereign wealth fund financed by issuing gilts and with a substantial proportion of its assets invested abroad. This would amount to a form of foreign exchange intervention, but it wouldn’t quite look like that. Again this would tend to lower the exchange rate.
Yet, as we have painfully learned from our history, a lower exchange rate is no use if it is offset by a surge in costs and prices. It is the real exchange rate (i.e. the nominal rate adjusted for the price level) that matters.