MONEY AND THE CITY
Freezing is not expanding
Nicholas Davenport
I had all along secretly hoped — dare I confess it? — that the Downing Street talks would break down. The shadow of a corporate state lay too darkly upon them. When the vested interests of capital and labour get together and are backed up by a government pouring out money to keep them happy we consumers and, we taxpayers are bound to feel the pinch. It is ' them' and ' us' again. There was a further danger. Messrs Scanlon and Jones avowedly want to replace the capitalist System with their own brand of communism and as they are not prepared for civil war they sought to use the Downing Street talks to force Mr Heath to concede anti-capitalist points, such as some form of capital tax. As I have said, any wealth tax Proposed by Hugh Scanlon is bound to Mean confiscation, not distribution, of Wealth. Perhaps Mr Heath saw the danger in time of a consensus with these terrible twins.
Will they now accept the freeze? "Not bloody likely," but the moderates should While this Government made an appalling blunder in restoring certain tax concessions for the rich (an election pledge Which Labour will never forget) it has certainly done a lot to make society less unfair for the poor and the pensioners. Indeed, our socialist professor Kaldor has confessed that it has done far more than 1\4r Wilson ever did. This should strengthen the hand of the moderates. Indeed, the real danger now is that the dogooder Mr Heath, in trying to placate the Joneses and Scanlons and avoid a confrontation, will go too far in his antiinflation legislation in shackling the whole Private enterprise system. We must not lose sight of the fact that it is private enterprise in the private sector which makes the whole economy tick and earns the surplus on the balance of payments. The public sector is an adjunct — a necessarily expanding adjunct, of course, in a social welfare state — but it is not the sector which makes the economy grow. Indeed, it is responsible for the biggest debit item in the balance of payments and, the private export trade is not nourishing, it could destroy the £. _rIt was primarily to save sterling that our P agniatist Prime Minister had to impose a three-months freeze on prices, wages, rents and dividends. The £ had been very
weak—down to $2.32—and if it had gone on floundering down to $2.20, as the West Germans were talking, it could have held up our entry into the Common Market on January 1. We have got to fix a tenable rate before that and the three-months freeze should enable a rate between $2.35 and $2.40 to be held. When the freeze is over anything could happen, which means that the £ could float again. But we shall then be inside the EEC.
The Stock Exchange greeted the freeze with a cheer because anything which smacks of firmer government from Mr Heath is regarded as a bullish sign. But, as I keep on repeating ad nauseam, a major bull market has to feed on a conjuncture of favourable political and economic factors. If the political factor, which had turned sour, could become favourable again the bull market might be restored to its former glory. But it is too early to say that this is likely to happen. And although the retail trade is booming and the whole economy is picking up it cannot be said that the economic factor is helped by the freeze. The CBI members have been holding a 5 per cent price-restraint policy for fifteen months and just when they were looking for some respite they are held to a threemonths freeze. This may be shackling the private enterprise system too much. We cannot therefore regard the freeze as Fl bull point for the economy.
It must be remembered that the optimism expressed by members of the CBI in their October survey and by the Financial Times monthly survey published on Monday conveyed the change of mood brought about by the Downing Street talks. It was all pre-breakdown and prefreeze. I cannot believe that the next surveys will be anything like so optimistic. Some hefty wage rises were granted before the freeze and the erosion of profit margins is now to be prolonged for three months or more. If a voluntary incomes policy were to follow, on the lines of the Downing Street talks' — the flat £2 to £2.60 increase in wages was equivalent to around 8 per cent — we may have to revise our estimates of the rise in company profits, so that the market may not look technically so cheap.
You cannot go on allowing a bigger share of the national income cake to go to wages and salaries and a smaller slice to company profits without cutting down the amount available to finance company investment and expansion. Depreciation of assets is only allowed against profits up to the original cost of the assets. Replace ment at today's inflated prices may mean 'double the provision required, so that half this would have to be financed out of
taxed profits.. The deterioration in the liquidity position of industrial and commercial companies is already painfully evident. Their capital accounts have been in deficit since 1970, and despite an improvement in the first holf of 1972 the capital deficit was still £170 million. In other words they are living on capital and the high cost of coming to the capital market is going to keep them strained.
Squeezing company profits kills the goose which lays the golden egg of capital growth. The authorities believe that a major industrial expansion has started in Britain but the engineering and capital goods sectors would regard this as a bad joke. Our boom remains lop-sided and only the retail trades, banking and financial services remain happy as, indeed, they should in the face of the Government's huge monetary reflation. These lucky beneficiaries have never had it so good, but the manufacturers, especially those with large forces of recalcitrant labour, have never had it so hard.
The militant trade unionists who go on demanding a larger slice of the national cake point to the enormous profits being made on the Stock Exchange out of property and company take-overs and mergers. There is unfortunately a spate of company take-over bids at this awkward moment of confrontation in our split society. Bovis is bidding for P and 0, Trafalgar House for Bowater, Bowater for Ralli, British American Tobacco for International Stores, and a host of others of less breathtaking size. Has it ever occurred to the militants to ask why the capitalist system is in such a take-over frenzy? Because with the present high cost of labour and of money it does not pay any honest manufacturer to come to the market and raise money for making either domestic or export goods. The adventurous entrepreneur, who is the life of the private enterprise system, has therefore to look around for companies which are not fully exploiting the assets they are sitting on.
It is fitting that the first job of the new head of the Department of Trade and Industry is to approve or disapprove of the Bowater, Ralli and Trafalgar House bids. Mr Walker is an ex-associate of Jim Slater who has a big holding in Bowater and in Ralli. Was it an oversight of the freeze White Paper to omit a freeze for takeovers? Or Or plain commonsense to avoid a complete strangulation of the private enterprise capitalist system?
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