Dodging the taxing issue of sterling control

Margaret Beckett may have been greeted by some sceptical looks this week at the Engineering Employers Federation’s annual dinner. Her advice to British industry seems to be to batten down the hatches and sit through the storm, as if the economic climate is as unpredictable and unmanageable as the British weather. But that’s far from […]

Margaret Beckett may have been greeted by some sceptical looks this week at the Engineering Employers Federation’s annual dinner.

Her advice to British industry seems to be to batten down the hatches and sit through the storm, as if the economic climate is as unpredictable and unmanageable as the British weather.

But that’s far from true. Admittedly, the Asian markets’ crisis is something only the most prescient firms may have predicted. And it is a phenomenon that does not detract from the longer-term growth potential of markets for British exporters and investors in the East. Beckett is right to urge business to stand firm.

But the Government’s stance that it can do little about interest rates and the high pound is missing something important: taxation. So far, it has dodged any fiscal intervention that could help industry deal with the high value of sterling.

Leaving the interest rate in the hands of an independent Bank of England is not the issue. The problem is that having given control of this part of the economy – and responsibility for keeping inflation down – to the Monetary Policy Committee, the Government has also bound itself by its election promises not to use any other fiscal means of economic management.

As the Trends figures show (page 54), factory output is in decline. But pay rises are creeping up, adding to pressure against any rates reduction to help bring the value of sterling down.

Many economists believe the Government should have used tax to damp domestic spending, such as a temporary hike in VAT to 20%. That would have allowed more flexibility on interest rates.

As it is, growth in the service sector threatens to drive up inflation, but the tool to control it – interest rates – is hitting not the service sector, but manufacturing.

So it is little wonder that EEF members are far from happy.