THE ECONOMY
The qualms that beset an apprehensive disposition
JOCK BRUCE-GARD YNE
Iam, as Chancellor Lawson told the watching millions on BBC television on Sunday (are there really watching millions at 1 p.m. on Sunday?), 'of an apprehensive disposition'. I had never before experi- enced analysis of my psyche on television: I confess it gave a twinge of narcissistic pleasure. More to the point, he was abso- lutely right. Like Itma's Mrs Mopp I have always found that fearing the worst is the best recipe for contentment. The Chancel- lor is of a more robust disposition. He is also a far more subtle politician than I could ever aspire to be, or than he is often given credit for. Hence last week's Au- tumn Statement.
As the real mastermind behind the new Government's post-election economic poli- cy back in 1979, he sensed two key aspects of the contemporary public mood at that time. One was a very lively fear of the hyperinflation which had been the scourge of the 1970s; the other, a deep resentment of the scale of tax-deduction from the payroll. He perceived it was the season for monetary discipline, and reductions in direct taxation. But popular sentiment changes. Inflation is no longer the bogy that it used to be, and extra kidney- machines and better 0-level results are the flavours of the season.
So, substantially enhanced expenditure, targeted in particular at health and educa- tion, responds to the public mood, just as the cut of 3p in the standard rate and the medium term financial strategy did in 1979. Nor is the revenue side of the Chancellor's Autumn Statement inherently improbable: with earnings rising by six per cent, topped up with lavish credit to be spent on consumer purchases, and corporate profits (no longer shielded by investment allo- wances) also rising strongly, Government revenues other than those from from oil should indeed make it possible to accomo- date the increase in public spending within the Budget deficit of £7 billion pencilled in for 1987-8, if the Chancellor decides, come Budget time, to stick with that as he has promised.
Where apprehension begins to stir is when you look more closely at how the extra provision for health, education and the local authorities is likely to be spent. For the most part it reflects no more than acceptance of a fait accompli: the fact that local authorities have committed them- selves to wage increases for their payrolls which cannot be met from their existing budgets, and that Messrs Baker and Rif- kind have been allowed to try and buy peace in the classrooms. A failure to accomodate these prospective cost in- creases would have led to horrendous rises in the rates in 1987, coupled with enforced closures of hospital wards and classrooms which the hospital boards and education authorities could not afford to run. Clearly an unappetising outlook for an Election year. But after this I am afraid it is not much good the environment secretary, Nicholas Ridley, telling local authorities to ignore national wage settlements and pay what they can afford. For why should they, when it has become apparent that the Treasury will come up with whatever money the said authorities pre-empt?
Which leads straight into apprehension number two. One of the tables attached to the Autumn Statement told us that unit labour costs in manufacturing industry will grow next year by just 2.5 per cent. That would certainly be a turn-up for the book. Unfortunately when you study the small print it begins to look as though the Treasury itself takes this with a pinch of salt. 'Actual unit labour costs for the non-oil private sector', you read, 'may rise by around four per cent next year, and manufacturing unit labour costs by rather less' (my italics). In this context 1.5 per cent is a pretty remarkable 'rather'.
Even that four per cent in the small print is clearly based on the promise of growth in thw whole economy rising to three per cent next year. Where is the growth to come from? In part from the continuing consum- er boom, and there is no argument about that. But in part also from an impressive projected 5.5 per cent growth in exports, implying some progress in our share of world markets. This in turn is based on the competitiveness gained from the sharp fall in the value of sterling vis-à-vis the deuts- chemark and yen. Here, too, those of us of an 'apprehensive disposition' are bound to have qualms. Are British boardrooms real- ly going to go out into the markets of the world to steal business from the likes of Siemen and Nissan by holding their prices in sterling terms? They are liable to find the corporate predators upon their door- steps if they do. Since most boardrooms have a healthy interest in their own surviv- al, is it not inherently more likely that they will continue to do what they have done hitherto: use the exchange rate deprecia- tion to push up their profits by improving their sterling export margins?
If so the Chancellor's prediction of a £1.5 billion balance of payments deficit next year would be likely to prove a substantial underestimate. Now that is not necessarily disastrous: have not the Amer- icans amply demonstrated that it is possible to run a very large trade deficit for years without sufferring horrible consequences for the exchange rate or domestic infla- tion? All you have to do is to keep your interest rates at levels sufficiently remun- erative to tempt aboard the savings of more cautious lands.
That certainly seemed to be Mr Law- son's message over last weekend. Admit- tedly he put it somewhat differently, prom- isirig that any further weakness in sterling resulting from a temporary blip in Labour's Election prospects, as registered by the Opinion Polls, would be dealt with by a rise in interest rates. But it comes to much the same thing. Only will it really happen? The Government hardly looked relaxed about the pressure for higher interest rates last month, and it takes some faith to believe that another increase in mortgage rates would be accepted with equanimity as the polls approach.
Hence the last, and greatest, apprehension. Larger public spending programmes piled on top of a consumer boom may be sustainable — for long enough to see us through the next Elec- tion, at any rate — providing the rate of interest is kept high enough to attract those foreign savings. But suppose Opec should succeed, as some observers think it will, in boosting the price of oil this winter. Or that those in Washington who favour a still cheaper price for dollars win the current argument. Either way market pressures could build up for a cut in UK interest rates. Would they be resisted?
Assuming that we continue to steer by nothing more specific than a vague convic- tion that the pound has fallen far enough, will we contrive to convince the watching world that fiscal relaxation is counter- balanced by adequate monetary restraint? If we don't then I don't think I would want to be in Mr Lawson's shoes — unless he can persuade his mistress that she shouldn't in the words of the old song, `dilly-dally on the way'. But that's what comes of an 'apprehensive disposition'.
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