Crows Outside

First, squeezing domestic demand does not improve the real terms of trade. It may reduce imports by making people poorer, but that’s not the same as improving the country’s external position in any meaningful developmental sense. It says: consume less, invest less, produce less, tolerate unemployment and underemployment, and hope the import bill falls. In other words: austerity as external management. Second, if the UK’s vulnerability is dependence on imported energy, food and manufactures, then cutting domestic investment in energy, infrastructure, industrial capacity and productivity is self-defeating. It may improve an accounting ratio temporarily, but it worsens the real constraint. You are advocating protecting sterling today by weakening the productive base tomorrow. Third, a downward fx adjustment is not automatically disastrous. It may raise import prices. But the policy question is then distributional and structural: who absorbs the price shock, what domestic capacity is built, what imports are essential, what can be substituted, and how fiscal policy protects lower income households. Treating any depreciation as catastrophic turns the exchange rate into a policy veto. Fourth, higher interest rates increase sterling income paid to holders of government liabilities, adding to fiscal transfers and reducing fiscal space, while supporting asset incomes and subsidising foreign sector exports to the UK. They are not simply a demand suppressing anti-inflation tool. The belief that sterling must be defended by high interest rates and lower public spending is a very orthodox external discipline story. Instead, policy should always be focused on seeking to improve the real terms of trade.