As the largest rail strikes in a generation threaten to morph into a “summer of discontent”, faith in the British economy and the institutions responsible for managing it is fading. Zero or very low growth is expected for years to come. Inflation is likely to be higher and more persistent here than in many other developed countries. Even before this week’s industrial action, and the Government’s evident unwillingness to do anything practical to prevent the unions from bringing the country to a halt, ministers seemed to be in denial about the scale of the crisis facing Britain.
One of the consequences is that the value of the pound has been declining relative to other major currencies. This is not like parts of the post-war period, when exchange rates were fixed by governments. Harold Wilson suddenly devalued sterling by 14 per cent against the dollar in 1967, and memorably declared that it did not mean that a “pound here in Britain, in your pocket” would be worth less. But it did mean that imports became more expensive, and it was no real alternative to fixing the structural problems that had left the UK uncompetitive compared with its peers.
Now exchange rates are set by international markets, and they are taking an increasingly dim view of how the British economy is being managed. The Bank of England has been much slower than the likes of the US Federal Reserve in raising interest rates to rein in inflation, which has pushed the pound down against the dollar. The Government has no real plan to revive economic growth, which by some forecasts will trail not only the United States but also much of Europe. More generally, there is no sense that the authorities are taking the current situation anywhere near seriously enough.
The pound’s weakness will be felt by holidaymakers this summer, when they will find that their money does not go as far abroad as it did in previous years. It will contribute to inflation, because the country will have to pay more to purchase the goods and services that it imports from overseas. It is also important to international trade that the currency’s value remains relatively stable.
The last thing Britain needs is another crisis to add to the growing list of traumas already being inflicted on the public. The Government and the Bank of England need to take inflation far more seriously. It is not just their credibility on the line.