The Economy
Action for the New Government
By NICHOLAS DAVENPORT
THE first task of the new Government is to take more positive action to redress the balance of pay- ments than just borrow quietly, as Mr. Maudling has done, from the central banks—to the tune last month of some £40 mil- lion. It is understandable that neither party wanted to talk about a sterling crisis during the election campaign. It would only have alarmed the foreigner as well as the voter and while it would have made the optimistic Mr. Maudling look rather silly .R might have lost votes for Labour on the grounds that the last Labour Government did not know how to handle an exchange crisis. But Mr. Wilson lost no opportunity to point out that the failure of exports to match the rise in imports, which has landed us in this balance of payments mess, was due mainly to the failure of the Tory Party to plan investment scientifically. When the deficit on our international account has reached the dan- gerous rate of £400 million a year on trading and .£600 million a year on current and long-term Capital transactions combined it means that there is a deep-rooted trouble. Clearly it will require some drastic measures, both short-term and long- term, to put things right.
The corrective measures can take three forms: deflation, devaluation and a mixture of exchange control, import control and export subsidy. Deflation in the style of Thorneycroft and Nelwyn Lloyd with a 7 per cent Bank rate, a credit squeeze and a 10 per cent surcharge on excise taxes is definitely out. This would be quite unsuitable for our present malady. The expan- sion of the economy is already flagging and retail trade is sluggish. It would be absurd' to halt much-needed investment with dearer money and kill recovery altogether. I was surprised to ee that Mr. Callaghan talked of raising Bank rate in the conventional way. As Mr. Roosa, the under-secretary of the American Treasury, said last week, 'tight money' as a cure for balance of payments deficits was no longer appropriate In most countries. I suppose that Bank rate could be raised by a Labour Chancellor who was nervy and frightened by his job but it would be useless to attempt to bring back 'hot' money to London which had run away in alarm at a Labour Government. To push our Treasury bill rate far above the American would also annoy Mr. Roosa, who has just reminded us that adjustment policies' should not be undertaken Without close consultation with other countries. The last thing the American Treasury wants is to bring their own recovery to a halt by dearer money and tighter credit.
Devaluation at this stage, is also out. The IMF and the central banks would not have put thousands of millions of dollars at our disposal Without a guarantee that no unilateral devalua- tion would be attempted. With wages rising rapidly on the Continent and with American labour costs far above our own there is no sug- gestion that we are yet being priced out of the 1 °reign markets. What export troubles we have can. be attributed more often than not to bad design, bad sales organisation and lack of con- tact with the needs of overseas buyers. In other
words, bad management rather than dear labour. We might come to devaluation later on if other measures failed to right the balance.
So we come to the third course of action as the most likely and practicable—the mixture of exchange control, import control and export subsidy. Under the Exchange Control Act of 1947 the Treasury already has the powers to sew up exchange transactions as tightly as it thinks fit. The Bank of England can say `no' where it has previously been saying 'yes' to the various applications it receives for foreign exchange from British companies investing overseas. For example, it could have said `no' to the Shell group who recently obtained £60 million of foreign exchange for the Italian Montecatini. Why did it not insist in this ease that the senior partner—Royal Dutch—should provide the foreign currency required? The Bank of England should be instructed to be more tight- fisted in future. When we are running a huge deficit it is absurd to allow private enterprise capital to invest abroad just what it pleases. Next, the foreign travel allowance of £250 per person could be temporarily reduced. As pass- ports no longer have to be marked, there is an opportunity here for abuse and there is no doubt that it is being taken by those who wish to put some capital abroad outside the regulations. But of more importance is the cutting down of the Government's own expenditure abroad. This is primarily on defence but no one will believe that the Defence Ministry could not reduce its spending on foreign bases and stores without the loss of military preparedness. Mr. McNamara proved that it could be done for America.
As regards import controls, this may offend GATT but it is agreed by the IMF that where a serious deficit has to be corrected on a country's international account temporary import controls may be imposed. It is up to the Board of Trade to work out import quotas for select classes of goods, starting with luxury food and drink, tobacco, cameras, clothing and footwear, and other manufactured consumer goods of an expensive sort. '
It would also offend GATT to grant any sub-
aidy for exports, but many countries have adopted various ingenious devices for helping their exporters and one which we might adopt is a saving of tax (profits tax, for example) or an increased investment allowance for plant designed for the export trade. Longer export credits could also be given to match our com- petitors' offers. It was depressing to read a re- cent article in the Financial Times pointing out that in the engineering industry export sales were rarely profitable as compared with the home market. A Derbyshire metal company was quoted as saying: 'We are keen on exporting but in our boardroom we have to face the fact that there is little in it for shareholders.' Here is a case where the State, according to the Labour creed, would be justified in organising a group for the purpose of exporting goods which have too little profit for shareholders, either because of bad management or bad factory lay-out.
This is the sort of action which the new Government must immediately take. It will no longer be decent to rely on Mr. Maudling's com- placent assertion that exports will pick up next year on their own. They will have to be pushed up.
Previous page
