The Budget's capitalist conundrum
Nicholas Davenport
The Budget is a month away and already people are saying that Mr Barber is preparing to hand out another £300 million or so. When will the largesse stop? Since this Government came into power it has already bestowed £3000 million by way of taxation relief. Last year net disposable income per person rose by 8 per cent and every Tory minister proudly echoed, Saint Macmillan's cry that people have never had it so good. But as the national product could not have risen by as much as 5 per cent in real terms the result was more inflation.
As a general economic proposition it is fair to say that governments, not the trade unions, are responsible for generating inflation. They do it by ill-balanced spending, taxation and monetary policies. The annual wage claims of the trade unions started up after the war as a response to the annual taxation and monetary demands of the government intent on ' demand-management' of the economy. Higher taxation and dearer money generate inflation because wage claims are advanced to protect the standard of living of the workers. Of course, now that the powerful unions can force a rise in wages far in excess of the rise in output and productivity, and others follow in industries where productivity is advancing more slowly, the inflation is greatly aggravated. The spiral of wages chasing prices and prices chasing wages then gets out of control. Mr Heath's Phase 2 and 3 controls are intended to bring the spiral to a halt but his recent remarks in the Commons and at Bournemouth last weekend were so ambiguous that the Stock Exchange, not to mention Mr Enoch Powell, has taken fright.
Are there any grounds for the fear that Mr Heath, in turning socialist, is making the working of a capitalist free enterprise system impossible? In answer to a question in the House of Commons on January 30 he was at pains to declare that the objective of Phase 2 and Phase 3 was to ensure that profitability would be sufficient to allow increasing investment to take place. But he went on to say, " there is no justification for excessive profitability because of increased prices due to dearer raw materials or because of the increased turnover which a large part of industry is enjoying with the expansion of the economy." But the whole aim of private enterprise is to increase turnover and if greater profits accrue as a result, why are they " excessive "? Is Mr Heath trying to say that when the increased turnover is due to the Government's reflation of the economy the extra profit should belong to the State? If so, he should confiscate the huge extra profits of the joint stock banks because these profits have been swollen by the Government boosting the money supply and raising the money rate of interest to fantastically high levels. I am sure Mr Hugh Scanlan would agree.
In his speech to the Young Conservatives at Bournemouth on Saturday Mr Heath seemed to be replying to Conservative critics of his policy when he said: " Free enterprise is a tool to be used by man, not a god to be worshipped . . . There is a role for Government in running the economy." But does he know how? Or what sort of economy? It is not only Mr Enoch Powell who objects to the new Heathian attack on the tree enterprise capitalist system but Mr Michael Clapham who is president of the CBI. Address ing the London and South Eastern region of the CBI last week he said he welcomed the Government's counter-inflation policy but remained " seriously worried by some aspects of Phase 2 as set out in the White Paper and draft Bill." Company profitability today, he said, was at its lowest in history. Taking " real net trading profits," that is, gross trading profits less• capital consumption and stock appreciation at constant prices, these were lower in 1969, 1970 and 1971 than in any year since 1948 when figures were first available. In 1971 they were actually one third below the peak levels of 1960 and 1964. In manufacturing industry the rate of return on capital — on a cost replacement basis before tax — had fallen from 16.7 per cent in 1949 to 5.7 per cent in 1970. Yet Mr Heath was chiding businessmen in his Bournemouth speech for their " strong vein of caution" in not investing in new plant and equipment. How can they undertake new investment when they have an insufficiency of profits to finance it or find interest rates too high to raise the money in the capital market? How can they afford to stock up when the banks can charge up to 12 per cent?
Mr Clapham also mentioned that over the period 1948 to 1971, when the national income rose by over two-thirds, the net trading profits of companies fell as a proportion of national income from 13.5 per cent to 7 per cent, while the proportion of wages and salaries rose from 64.8 per cent to 74.7 per cent. Profits take a smaller share of the national income, he said, than in any of our main trading competitors. Whether Britain had a socialist or capitalist or mixed economy system, he added, any country which invested so small a percentage of its national income was doomed. By limiting profit margins at a time of rising turnover and falling overheads the Government, in Mr Clapham's view, was penalising industrial profitability and killing investment. If the Whitehall machine, which appears to be running this Government, does not understand these capitalist fundamentals, it is time the sensible moderate trade union leaders got on to the managing boards of companies in the private sector. It was good to see that the TUC have at last consented to allow worker directors to be appointed to company boards. Whether it will be the German system of a supervisory board, where workers and employers can be 50/50, or whether workers will be represented on actual management committees, does not really matter. The important point is to get men of common sense running our business affairs and not civil servants.
But to return to the Budget. The Government has once again got itself in an inflationary mess because public expenditure, which was forecast to rise 5.3 per cent in 1972-73 and drop sharply in the following year, now looks as if it will reach 6 per cent this year because of the short-fall in 1972-73. This means a larger borrowing requirement, which the CBI puts at £4000 million, and a bigger increase in the money supply unless the Treasury can sell more gilt-edged stock to the non-banking public, which it won't if it keeps pushing up the rate of interest. Meanwhile the balance of payments is running into deficit, the floating E is under suspicion and its fall is inflating the cost of living. In these circumstances the conservatively orthodox Roy Jenkins would be increasing taxation if he were introducing this Budget. But the present socialist team — Messrs Heath and Barber — will no doubt obey the TUC and hand out more largesse — I 'nope to pensioners and poor who will not buy more consumer durables and worsen the balance of payments — and expect Mr Clapham and his business friends to go on squeezing their profit margins and invest for a future they cannot believe in.
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