Devaluation – not such an easy option for most of us.

Readers of this site will know that I expect the squeeze on people’s incomes to intensify this autumn and winter. The government has decided that it is not going to make any of the adjustment in the public sector by reducing its spending – on the contrary it is boosting it in the most irresponsible way, to pay for its state pensioners like Northern Rock. As the country has borrowed too much on a grand scale that means individuals and families have to tighten their belts even more.

We all know that part of the belt tightening is forced on us by higher Council taxes, higher tax from petrol and diesel, threatened higher Vehicle Excise Duty and the abolition of the 10p band. We all know another part of it comes from rip off government, with endless increases in fees and charges for government “services”.

This week we are witnessing a third part of the squeeze – devaluation of our currency. In recent months we have got used to devaluation against the Euro. We have had a 10% devaluation compared with its starting rate, meaning that if anyone does want to buy a German car or a bottle of French wine it costs 10% more. Now we are having to get used to devaluation against the dollar. The government has presided over a 7% devaluation in just the last couple of weeks.

Labour governments have a habit of devaluing. In the days of fixed exchange rates there was drama, with a government trying to “save” the pound, only to give in in the end. Labour took us down from the $4.03 rate to $2.80 on 14th September 1949, and devalued again on 18th November 1967 from $2.80 to $2.40. Now they are in the process of taking the pound down from over $2 where it had reached in the early 1990s and again last year, under a regime of floating rates. There will be less drama, but the effects on our living standards will be the same.

I prefer floating rates to fixed rates, and recognise just how much damage was done to the UK economy in the past by trying to defend silly rates. The devaluation we have had recently against the Euro will help our exporters. However, if a government uses floating rates to remove discipline over its own budgets and finances, it will end in tears. If a government spends, borrows and inflates the public sector too much the currency will give too much, helping fuel the inflation. This government had better be more careful, now it is embarked on this slippery path. Currency falls can run further than the authorities might like if they remain careless about them and their causes.

What we can be sure about is that people are getting poorer because the government is determined to stay richer. The devaluation of recent days against the dollar, and the devaluation of recent months against the Euro has cut the value of the “pound in your pocket”. Many commodities and products are priced in dollars on world markets. They are suddenly dearer thanks to the fall in the pound. That means we can buy less of them.

So pull in that belt a bit more. Living standards are falling and have further to fall. An overborrowed government has no intention of tightening its belt, so that means the rest of us have to do so even more.