Towards a New Financial Agency? MONEY
NICHOLAS DAVENPORT
A Chancellor who takes an hour and a half to say that he is doing nothing to add to our grievous fiscal burdens will clearly disappoint a City which had hoped he would lighten them. What is more, he is even threatening the City establishment, which is an ugly thing to do. A wider review of all tax avoidance practices is being undertaken and in the next budget the tax net will be widened, strengthened and tightened —for the very few millionaires who still retain a domicile in the country. On Monday this week The Times published the results of an investiga- tion into tax reform undertaken by four City experts. It was well worth studying. The con- fiscatory top rates of personal tax-911 per cent when a man earns over £18,000—are, they say, an insult to the taxpayer, implying that it is im- moral to earn so much money although the earner might have contributed £18 million to the national product. In America the top rate of tax is about 70 per cent and it is rare for any busi- nessman to pay much more than 50 per cent. The excessive taxation of personal incomes in this country is now interfering with the growth of the economy and the average worker is as skilled a tax dodger as the average employer.
The non-budget was obviously more helpful to the gilt-edged market than to equity shares. The improvement in the balance of payments and the general fall in the level of interest rates, which had already brought about a remarkable recovery in government bonds, would, the Chancellor thought, gather momentum. He had himself helped to give 'a shove' to the down- wards trend of interest rates by convening a meeting at Chequers earlier in the year of the finance ministers of four industrial countries and as a result our own Bank rate was lowered in two stages to 6 per cent. 'I hope,' he added, `to see a continuing gradual decline of interest rates in other countries which should have a corre- sponding effect here,' but he refrained from suggesting when Bank rate was likely to return to 5 per cent. Indeed, he went out of his way to say that he would take great care that the method of financing the increased borrowing requirements of the Exchequer this year would not lead to 'an unduly large increase in monetary liquidity.'
Every sophisticate in the gilt-edged market knows that the only way to force down the level of domestic interest rates is by increasing the supply of money. So although the Chancellor looks forward to a 'continuing strength in the gilt-edged market and a good demand for government securities during the next twelve months,' he is not going out of his way to boost the market by increasing the money supply. This in my opinion is regrettable, for, if he does not bring the long-term rate of interest down to 51 per cent very soon he will miss the chance to stimulate industrial investment which is now badly flagging. Few industrialists will invest on the promised 3 per cent growth rate which seems to be based on the 6 per cent wage rise the Chancellor has pledged himself to prevent.
As heavier government borrowing has been causing some misgiving among bankers in the City, if not among the more intelligent gnomes in Zurich, it may be as well to set out the budget arithmetic. Loans from the Consolidated Fund for capital expenditures last year rose to £1,478 million, mainly as the result of additional lending to the local authorities. The surplus above-the-line being only £738 million (against the estimate of £1,047 million) the Treasury's borrowing requirement came to £740 million instead of the expected £287 million. With a revenue surplus this year of £637 million the borrowing requirement goes up to £943 million —close enough to the dread figure of £1,000 million to appear frightening to the conservative City establishment. But there is really nothing in it. Much of the net outgoings from the Con- solidated Fund this year of £1,548 million is useful investment calculated to strengthen the economy. Almost 60 per cent goes to finance the investment needs of the nationalised indus- tries. The largest borrowers are the Electricity Council and the Gas Council (the latter taking £61 million more to exploit the discovery of North Sea gas) and a new provision is £75 million for the National Steel Corporation. Of the rest the chief item is loans to local authorities through the Public Works Loan Board amount- ing to £480 million net (the PWLB ceiling being 34 per cent of their capital payments).
The Chancellor is, however, well aware that large loans from the Consolidated Fund crowd- ing in his budget statement are likely to arouse alarmed comment from ignorant bankers, so he is at last considering a change in the technique of public finance. 'Is it necessarily the best arrangement,' he asks, 'that so much of the bor- rowing requirement of local authorities and public corporations is financed in the first in- stance by the Exchequer?' This points to the set- ting-up of a government financial agency (which I have long advocated) which can borrow direct from the market and remove a lot of the capital finance of public authorities from the central budget account. Such an agency would at least make clear to the public at home and abroad where public capital investment is creating use- ful economic assets.
The Chancellor did his best to help the equity market on the Stock Exchange but I fear his forecast of a 3 per cent growth rate will not receive many backers. It was good that he en- dorsed the need for a mixed economy with public and private enterprise working side by side, that he recognised that the private sector must be encouraged to be efficient and expand and be profitable. But if there is to be a con- siderable rise in wages after July and if the Prices and Incomes Board is to restrain the rise in prices, as it did so successfully in 1966, how is the level of profitability likely to in- crease? If growth is in fact resumed this year at a 3 per cent rate the City is looking forward at best to a period of what has come to be known as 'profitless prosperity.'
Mr Callaghan is perhaps the first Chancellor to demonstrate that what is important economic- ally is not what is in the budget but what is not in the budget. He is now controlling the economy by the capital spending of the public sector. There is no harm in that, as he is ready to curtail public investment when private in- vestment revives, but his attempted stimulation of private investment—the goose that lays the golden eggs—is not, the City fears, likely to suc- ceed on the lines he is working.
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