THE BUDGET AND THE GILT-EDGED MARKET
By NICHOLAS DAVENPORT ONCE again the City editor of the News Chronicle deserves an `Oscar' from the harder-faced bankers for his Budget comment, to wit, that it is a question whether Mr. Amory 'is not doing too much, too early.' It is well that he added that this does not appear to be a widely held opinion. But the Economist sub- scribes to the Scrooge party when it plants in its readers' thoughts the .question whether the Budget will be 'the har- binger of economic re-expansion or merely of yet another autumn crisis.' If there is an autumn exchange crisis it will be because an election has been announced when the balance of payments is worsening (which it may do if a rise in imports antedates a recovery in exports). But it will not be because of the Economist's forebodings.
Perhaps the silliest suggestion of the fearful critics, which is echoed in some quarters of the City, is that the rate of interest will have to rise to curb the re-expansion. The Economist comes near to giving this its support when it remarks : `Since the Chancellor has gone to the limit in his fiscal reliefs he must be cautious in letting up any more in monetary policy.' It would be a crazy Chancellor indeed who decides to reflate the economy and then tries to check the reflation by dearer money. It would be more logical to sup- port the re-expansion with the time-honoured reflationary weapon of cheaper money. And it is absurd to say that the Chancellor has been 'letting up' on monetary policy. The undated government stocks are actually yielding more today than they did last summer. Old Consols are now giving a return of 4.83 per cent. which is nearly # per cent, more than they gave in the early spring of 1957, when the economic skies appeared clear. As everyone knows, intensive funding operations have prevented the long-term rate of interest from falling as it should. There has not been such a long period of high borrowing rates since 1918-20.
I hope that the gilt-edged market, or anyone else, is not going to be frightened at the thought of an over-all deficit of £721 million. This curious Treasury accountancy has no significance in the equation of the national savings and investment which is the real guarantee against inflationary finance. As the Economic Survey pointed out, some parts of the economy have a surplus of savings over their own investment while other parts invest more than they save. In the calendar year 1958, for example, 'persons' saved £760 mil- lion more than they invested and 'companies' £387 million more, but public corporations invested £578 million and local authorities £388 million • more than they saved. As the Government in that y..tar acquired forcible savings of £561 million and invested only £235 million the domestic hslance sheet ended up with an excess of savings of £507 million over investment, the figures being £4,077 million against £3,570 million.. The surplus is the notional figure for the net increase in the overseas assets of all UK residents.
The remarkable rise in personal and company savings is the main reason why. the Chancellor can s,ifely budget for an increase in investment. The higher interest rates offered on Savings Certificates and Defence Bonds attracted f240 million more savings in the last financial year (the total from the National Savings movement was over £300 million higher) and as these interest rates remain
the same the personal savings trend should remain upward. Company savings are also expected to increase. The Chancellor is anticipating a 10 per cent. decline this year in the capital spending of manufacturing industry and as he is looking for only a small rise in the total of private investment (of which manufacturing is 45 per cent.) he is rightly going for a substantial increase in the in- vestment programme of the public sector. An appendix in the Survey gave this increase for 1959-60 as £158 million over 1958-59, the total being £1,607 million. (The main increases were £54 million for electricity, £56 million for railways and roads, and £17 million for coal.) On the face of it there is every prospect of the national savings in 1959-60 being considerably in excess of the domestic investment, although the surplus for investment abroad will be lower than in 1958-59.
The finance of the capital spending of the pub- lic sector involves more market borrowing for the local authorities and either more funding operations for the Treasury or more Treasury bill issues by tender. (If the expected fall in the gold reserves materialises this will reduce the tap issues of Treasury bilk 1 Last year the Treasury had to
deal with no less than £1,270 million of maturi- ties, and it converted all but £366 million which was paid off in cash. This raised the floating debt but not in the form of Treasury bills held by the banks but of those held by the departments. The floating debt held by the public actually declined by about £250 million and thus the supply of bank money was restricted. This year the Chancellor said that funding operations 'would keep in step with the development of our economic policy generally.' This was intentionally vague, no doubt, but it cannot mean that funding operations will be pushed to the extent of driving down the gilt- edged market and raising the rate of interest, for this would work against his reflationary policy. It may therefore be assumed that the issue of Treasury bills by tender will beAncreased and the supply of bank money enlarged to take care ot the increase innational spending and income. Professor Paish,, who is no inflationist, considers that an increase of 'f150 million or so' in the Treasury bill issue would be in order. The Trea- sury would be wise not to commit itself to any figure but to let the supply of bank money rise as the banks require it for the implementation of the re-expansion policy. The avoidance of inflation will depend upon the over-all balance in the economy in general and the restraint of the trade unions in particular.
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