10 SEPTEMBER 1977, Page 13

In the City

Ironic surpluses

Nicholas Davenport

The type of humour which appeals to me is the ironic and as I move in the cynical financial world I often find much to raise a laugh. One of the biggest lately was when President Carter appointed Mr Bert Lance to be his Budget Director. Mr Lance was apparently famous for his ability in raising huge personal overdrafts at his banks. He even managed to borrow $2.6 million from the Manufacturers Hanover of New York to help him buy a controlling interest in the First National Bank of Georgia. Clearly he was the ideal man to finance President Carter's huge budget deficit of over $65 billion. More serious of course, than the exposure of Mr Bert Lance is whether President Carter will be exposed as a fake rainmaker. He is trying so hard to cure the world economic drought by his federal deficit spending but a bearish Wall Street does not seem to think that he will succeed.

Another big laugh will be raised at the disclosure of the Labour party losing nearly £100,000 over property speculation. There have been no more censorious critics of the great property boom than the holy puritans and levellers of the Labour party. Yet their National Executive set up a special company to take advantage of this wicked boom in the early 'seventies by developing some of their own sites and borrowing for this purpose from their constituency parties. The loans have now been repaid and the property company is to be wound up with an excess of £110,000 of current liabilities over current assets. 'Physician heal thyself' should be Mrs Thatcher's advice to the Labour party's secretary, Mr Ron Hayward, who was on the board.

But these laughs are over mere trivia. A more serious ironic event, which raises indeed a painful laugh, is that the TUC believes that the Government should boost the economy now that the workers have done their bit and the nation's finances are improving. Most of the credit for the appearance of better prospects, said Mr Jack Jones, goes to the ordinary people who had made the hardest sacrifices through pay restraint in the past two years. Certainly pay restraint has helped to bring down the rate of inflation — last month's price rise was at an annual rate of 11% against 17% early in the year — but this has had nothing to do with the improvement in the balance of payments. The truth is that the official reserves have had a substantial jump from $4 billion at the beginning of the year to $14.8 billion at the end of August — for entirely financial reasons which have nothing to do with the good behaviour of the working man. And who has said, looking at the constant irresponsible strikes, that it has been good?

The sensational rise in the reserves has been due to three financial causes — (1) as to about $3 billion from the unwinding of 'leads and lags' positions and the ending of the use of sterling in overseas trade,(2) about $2 billion from IMF and other public sector borrowings abroad, and (3) about $3 billion from the influx of foreign money which has come partly to take advantage of the high coupons offered by the Bank of England in the-gilt-edged market and partly to make a quick profit on the rise of sterling in the exchange market.

The improvement in the balance of payment has also been due in part to financial causes, that is, to the 'invisible' earnings which emanate from wicked capitalists and the moneymakers in the City. Last year 'invisible' earnings exceeded the value of all our exports of finished manufactures and were even equal to over half our total exports of goods. Invisibles' arise (a) from payments for services such as shipping, insurance, banking and broking, civil aviation etc. and (b) from interest, profits and dividends' earned on UK investments and construction contracts overseas. The most important of these, says the Treasury in its June report, are 'the financial and allied services associated with the City of London. Earnings from services provided by British insurance, banking, merchanting, brokerage and other financial services in 1976 amounted to £950 million.' To this amount must also be added the interest they earned which comes in the separate item (b) 'interest, profits & dividends.'

The balance of payments is to be further improved by causes outside the trade unions namely by oil and gas from the North Sea. This extra has been estimated by the Treasury in its August Progress Report. I have no space to give its table but its 1977 estimate is for an increase of £1.4 billion on current account or £2.1 billion if the capital account is included. This rises to £3.4 billion plus in 1978 and to £4.5 billion plus in 1979. From 1980 to 1985 the figure rises to £7.5 billion plus. These estimates allow for no change in the price of oil or in the price of sterling. If we are to add at least £2 billion in 1978 to our existing reserves of £8.5 billion we had better think of laying some of them out to repay the colossal debts we have incurred. The public sector has borrowed $20 billion abroad apart from the IMF credit of $4 billion.

If Mr Jack Jones were to get too excited by this rosy estimate for the balance of payments I would refer him to the second table in this Treasury paper which gives the employment income from oil and gas production. This year the oil and gas sold is estimated at £2.7 billion and the employment income generated by it at only £100 million. This figure remains constant up to 1980. So there is not much more employment to be had than 10,000 men, not the 100,000 expected.

The public sector borrowing requirement will, of course, be reduced by the trading surpluses of the British Gas Corporation and of the British National Oil Corporation as well as by receipts of the oil tax and royalties. On the other hand it will be increased by the huge finance required for future capital expenditure if the heady lord of the nationalised oil corporation is allowed to have his socialistic way. The net saving in the p.s.b.r, may be £2 billion, so that Mr Jones can legitimately claim that amount of reflationary tax lowering. And a bit more perhaps to take account of the Treasury's over-estimate of the p.s.b.r.

Historically the chronic restraint upon long-term growth in the UK has certainly been a weak balance of payments. Now that we should have a strong balance of payments over the next five years we should be able to embark on a long-term industrial investment programme without risk. But what is the use of it if the strong-arm trade unions demand unreasonably high wages which will increase unemployment and inflation? What is the use of more investment if the unions are not interested in increasing productivity? The TUC conference should have had this motto on their platform: 'Free collective bargaining without a social contract limiting the rise in incomes is incompatible with full employment even in a closed economy'. It was recently written by their socialist economist Lord Balogh, who has certainly done his best to make them wake up to the facts of economic life,