Can the boom last?
At long last British industrial investment is increasing, and the growth of the nation's industrial capacity has exceeded all exPettations. During the long period of preparation for entry into the European Economic Community Britain's industrial investors held their money back — partly because they were uncertain about what the effects of Market membership would be, Partly because some of them preferred to invest in the continent rather than in their own island, partly because they lacked confidence in the Government's commitment to growth. They feared that this Government, like every one of its predecessors since the war, would be forced, after an initial period of encouragement to industry, to deflate, either to prevent a currency crisis, or to bring about a more realistic relationship between its outgoings and its income from taxation than has commonly existed during the Opening 'go' stage of every `stop-go' cycle. With the decision to float the pound. and the continuing reduction of direct taxation, these fears began to be dissipated; and cautiously, carefully, and . then with increasing momentum, the British investor began to Put money where the Government's mouth was.
The importance of this expansion in capacity should not be underestimated. It is precisely what has eluded every Government since the war; and is the absolutely essential prerequisite of sustained econ'omic growth, of the kind which can put Britain's prosperity on a continually sound footing, and sustain a steady increase in our standard of living, unaffected by the lurches forward and backward, and the depressing alternation between inflation and deflation, which has bedevilled us since 1945. Our expansion in industial capacity is to a great degree financed by Massive public expenditure of the kind provided for in the Industry Act; and that finance is illusory rather than real: it consists of expenditure by the Government which is not financed by taxation. It is the spending of money that does not exist; and the Government hopes to meet its debts thus created out of growth itself, out, that is, of the buoyancy of taxation revenue. This gambler's attempt to strike a balance between expenditure and restraint is itself inflationary, and is very likely to contradict the anti-inflationary measures taken to control wages. That is the first danger that confronts the Government and the country. The second is that, though capacity is expanding, it is doing so at nothing like the general rate of growth, which currently stands at about six per cent.
Unless, however, growth in capacity matches general growth, demand will out-run supply, and this is a classic recipe for the kind of inflation which has always in the past, and will in the future, smash through the barriers of any kind of prices or incomes control. Because even now demand is outpacing supply, the Government must hope to sustain the present boom until Capacity catches up with growth,and supply with demand. MeanWhile, Mr Heath and his colleagues need an elaborate apparatus df controls to ensure that the gap between supply and demand does not become too great. They are juggling, therefore, with different rates — of industrial growth, wage increases, price increases, and wage and price inflation — in areas of economic activity where exact calculation is desperately difficult to achieve, but where it is absolutely essential that their calcu lations and forecasts should be correct. It will be far longer than the six months which the Guardian has suggested before we can see whether their gamble will come off. During whatever period is needed the Government must live on a knife's edge, for ministers know perfectly well that there are circumstances which would force even them to deflate and that deflation before the next general election would be economic and political suicide.
Further, the kind of boom which we are now enjoying — leaving aside for the moment its dangerous inflationary aspects — depends for ultimate success on a substantial growth in exports.
Exports are now growing, partly because of our access to European markets, partly because entry into the Com munity has not yet bitten deeply—as it will shortly do—into our exports to other foreign and Commonwealth countries, but most of all because of the floating exchange rate. In relation to exports the function of a floating rate is to enable a country to keep down the prices at which it sells its goods to others. The present rate of the dollar in terms of the pound is 2.49. Allowing for adjustment since made to other currencies this is about the same rate as was in force last November, when the' incomes and prices freeze began. In order to sustain exports at a steadily increasing level, , and to encourage further the growth of the export industries, the pound needs to fall at least another three points. It does not do so, partly because the float is dirty — that is, the Bank of England helps to support, and thus distort, the rate — partly because a further fall would precipitate a crisis in our relations with the European countries, who only barely tolerate the float as it is, and partly because sterling interest rates are kept artificially high. Artificially high interest rates encourage foreigners to hold sterling and risk a further market-enforced decline in the rate. Their holding of our currency reduces its supply, and therefore support a rate inimical to export growth. Here at least the Chan, cellor can act; and he Must very shortly reduce interest rates by at least one, and probably two, per cent.
Any analysis of the Government's current conduct of economic policy reveals a whole series of contradictions. There is a contradiction inherent in the way Mr Heath and his colleagues are trying to regulate the disparity between general growth and industrial capacity; a contradiction between the desire for exports and the management of the exchange rate; and a contradiction between restraint on wages and the desire for bouyancy of revenue. Above all, there is the contradiction inherent in a policy which relies for its success on the spending of money not raised in taxation. All of these contradictions suggest that the present boom has no more than a limited life. The people of this country, having had a pretty miserable time during Mr Wilson's various freezes and squeezes, will probably welcome the boom, hedged about by inflation though it is. But if, as seems likely, the boom's life is to be short, if it is to be no more than a particularly fast `go' amid the 'stops,' if the Heath Government is to be no more than a more risk-taking version ot earner post-war Lonservative governments, then the Prime Minister's announced determination "to change the whole historical direction of this country "will seem a tawdry piece of rhetoric indeed. Wishing him well yet fearing the worst, we must all wait and see.
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