Britain's Economy: The Big Lie
By NIGEL LAWSON
The economy's getting better. . . . He [the Chancellor of the Exchequer] will give an abso- lutely fair, frank, straight, honest statement tomorrow in the House of Commons on what the position looks like being. And I think that by this time the country has got pretty %;ell used to accepting that we do tell the facts.
—Mr. Harold Wilson, February 28, 1966.
In the last sixteen months the nation has made a substantial breakthrough in the post- war handling of our balance of payments problem. . . . Our aim is to achieve external balance . . . by the end of 1966, . . . and we are well on the way to achieving it. . . . The economy is therefore reasonably well poised.
—Mr. James Callaghan, March 1, 1966.
Bont parties are agreed that, as it was in 1964, the economy will be the main issue in the 1966 general election; and each has given it pride of place in its manifesto. Another issue, at a time when the public has become increasingly cynical in its attitude towards politicians of all kinds, may well prove to be whether the Wilson administration can be trusted to tell the truth to the people of Britain. A factual analysis of the present state of the economy, as the election campaign begins, may serve to shed some light on both these counts.
It is fortunate, therefore, that the National Institute of Economic and Social Research has this week published its usual detailed pre-Budget survey of the British economy. This, together with the published official statistics, enables a fairly reliable picture to be drawn.
First, the balance of payments. According to the Chancellor, the overall deficit was reduced in 1965 by getting on for £400 million. (this com- pares with the improvement of £500 million achieved by Mr. Selwyn Lloyd at the same stage of the previous economic cycle). As the well- known economist and Labour sympathiser, Pro- fessor Alan Day, put it in last Sunday's Observer, `About a quarter of the improvement was due to the import surcharge; about a quarter to the new capital controls; about a quarter to the unusually rapid rise in exports at a time when world trading conditions were unusually favourable; and about a quarter is attributable to the brake on imports associated with the slow rise in domestic activity between 1964 and 1965. It is hard to see any real "breakthrough" here.'
Indeed it is. And on this analysis the chances of eliminating the rest of the deficit by the target date of the end of this year look decidedly slender. Of the four factors that were operative in 1965, both the import surcharge and the capi- tal controls had a once-for-all effect which cannot be repeated this year: indeed, with the import surcharge due to be removed in November 1966 (two years after imposition), the prospect is for a corresponding deterioration in the balance of payments for 1967. With less favourable world trading conditions expected in 1966, the outlook for British exports is accordingly lesi promising. Nor is there very much cause for hope on the import side. In 1965 (on the National Institutes figures) the import bill was contained by the reduction in the nation's rate of economic growth from 4 per cent during the last year of the pre- vious Conservative administration to 1.6 per cent during the first year of the new Labour govern- ment. In 1966 the Institute, so far from expteting the rate of growth to fall still further, forecasts a small rise to about 2+ per cent. This will have a corresponding effect on the import bill.
The Institute's own assessment is that, so far from being able to fulfil the pledge given to our overseas creditors that Britain's balance of pay- ments gap would be closed by the end of this year, the Government is likely to face a deficit on current and long-term capital account for the second half of 1966 of an annual rate of £170 million. For the first half of 1967 it expects the deficit, in annual terms, to be running at some £120 million. This is bad enough: in the Institute's own words, 'our forecasts certainly imply that they [the Government] will fall some way short of achieving their objective.' As for the reliability of the forecasts, the Institute com- ments that 'if anything they may err on the side of optimism.'
They manifestly do. Little if any account seems to have been taken of the cost to the balance of payments of sanctions against Rho- desia, which, according to a Financial Times investigation, could amount to some £50 million this year—and a very great deal more, of course, if there is any interruption to supplies of Zam- bian copper. Again, net British private investment overseas, which has been running at an annual rate of £115 million since the new capital controls were imposed in the 1965 Budget, is expected by the Institute—for no compelling reason—to shrink to a mere £20 million in 1966.
But perhaps the most optimistic assumption of all made by the Institute in compiling its fore- cast is that the incomes policy will start to work this year—in its own words, `the Government seems likely to intervene more forcefully this year to keep the size of the wage increases down.' Certainly, the incomes policy could hardly be less effective in 1966 than it was in 1965, when hourly earnings rose by 9 per cent and pro- ductivity by only 1 per cent. Never in Britain's history has so large a gap been recorded between earnings and productivity. Last week the Direc- tor-General of the National Economic Develop- ment Council, Sir Robert Shone, submitted to Mr. George Brown and his fellow-members of Neddy a report setting out the true position and drawing the inevitable consequences. It was on the basis of this report that Sir Maurice Laing, president of the Confederation of British Indus- tries, which has frequently been praised by Mr. Brown for its readiness to co-operate with the Government, commented that the outcome of the Government's economic measures was 'some- what frightening.' Equally frightening, in its way, is the fact that the Government, presumably for electoral reasons, has apparently decided not to publish this alarming but important report, but to suppress it.
Nor, with unemployment even lower than in 1965—indeed, at its lowest level for a decade or more—and hence the demand for labour higher than ever, is there any reason, pace the National Institute, to expect the incomes policy to start working this year and inflationary pressures sig- nificantly to abate. And this in turn will mean a greater increase in imports in 1966 than the Institute expects; while, by 1967, the effect of two years of rapidly rising wage-costs will have begun to price British exports out of markets where at present we are still just manag- ing to hold on. In short, on present policies we can expect the balance of payments to be in deficit to the tune of some £250 million (annual rate) in the second half of this year, and to continue to be substantially in the red in 1967.
The impact of this course of events on the world monetary authorities, from whom we have borrowed £900 million and secured a further credit facility of some £700 million on the strength of the Government's firm assurance that our balance of payments would be out of the red by the end of this year, is not difficult to imagine. Nor is it difficult to conjecture the likely behaviour of private holders of sterling —not to mention speculators—as they see our reserves steadily dwindling.
Recently, newspapers that have attempted to publish the true state of the reserves have been personally reprimanded by the Chancellor of the Exchequer. Nevertheless, the public has a right to know the truth, however uncomfortable it may be to the Government of the day. Officially, our reserves now stand at £1,303 million. Of this, £316 million represents a book- keeping transfer from our second-line reserves, carried out last week as part of the Government's pre-election window-dressing, and a further £899 million is owed to the International Monetary Fund and the Swiss (part to be repaid by 1967, the rest by 1970). By the conventional account- ing, this leaves us with true first-line reserves of a mere £88 million (as against liabilities of over £4.000 million).
Even if we take the Chancellor's last-ditch figure of £1,800 million for combined first- and second- line reserves plus credit facilities, this has to be set against the £899 million owed to the IMF and the Swiss plus the further undisclosed claim against the reserves of approximately the same order of magnitude arising from the still sub- stantial forward 'bear' position in sterling. Inevitably, too, as the balance of payments con- tinues in substantial deficit, the underlying trend of the reserves will continue to be downward.
In these circumstances, the National Insti- tute is being remarkably restrained when it com- ments that 'the renewed run on sterling in August ,1965, and the weakening of sterling at the end of February this year, were both disconcerting.
. . The possibility of similar episodes at almost any time in the next two or three years cannot lbe ruled out.' In August 1965, as the Prime Minister has subsequently revealed, sterling was '‘-saved only by a whisker—and then only by the negotiation and announcement of a further rescue operation by the overseas central banks (minus the French, who by this time had realised the folly of throwing good money after bad). Next time there is a run on the £, it is incon- ceivable that a further borrowing operation could" be mounted. The truth of the matter is that, on the basis of present policies, we are a stagnant economy headed straight for a messy devalua- tion. Indeed, there is scarcely a single informed banker outside Britain who believes in his heart that on present policies the £ can be saved. The question they ask themselves is not whether it will go, but when.
It is in the light of this that the quotations at the head of this article should be re-read.
It may be argued by government apologists that all this is the result of the massive balance of payments deficit incurred by the previous Con- servative government in 1964. Whatever justice there may be in this, it is no excuse whatsoever for concealing the truth now. Nor is it much of a claim that the patient is still bleeding to death, but a little more slowly: the fact is that the loss of blood is increasing. Moreover, the 1964 deficit was incurred as the concomitant of an attempt to achieve faster economic growth. Those who all along maintained that, on the basis of the present exchange rate, 4 per cent a year growth was impossible have a right to criticise. Mr. Wilson and Mr. Callaghan do not: their
only contribution to the debate at the time was to urge still faster growth. Nor can the Con- servatives be properly faulted unless it can be demonstrated that, had they won the 1964 elec- tion, they would not have taken adequate correc- tive action. That is one thing we shall never know. All we do know is that the present Govern- ment has manifestly failed to do so.
The present economic crisis is the gravest the nation has faced since 1949. There are only two ways out : deflation plus sharply increased un- employment, or deflation at home plus devalua- tion—a planned devaluation, that is, which, unlike an involuntary one, would not be can- celled out by a blaze of inflation. Both of these the present Government has sworn not to use, although that does not mean that it will not use them. But meanwhile, to maintain the masquerade, it is forced to resort to denying that the crisis exists, to distorting the facts to suit its purposes, and to suppressing official docu- ments that might reveal the truth. No govern- ment has practised as big a deception on the electorate since Baldwin, in Churchill's words, 'put party before country' in the 'sealed lips' elec- tion of 1935. The public may well feel that whatever else it has a right to, it has a right to be told the truth. It may also be less than surprised that the election is being held, so sud- denly, now; before the truth is apparent to all.