In the City
Why the sterling crisis?
Nicholas Davenport
The negative response of the trade union leaders to Mr Healey's rabbit-out-of-the-hat legerdemain did not throw the Stock Exchange into a panic. The FT index fell to below 393 and business dropped away to a mere trickle but the beginning of the week saw a steadier trend in the gilt-edged mar ket. The City had, in fact, assumed that the initial response of the unions to the 3 per cent Wage rise limit would be negative, that bar gaining would begin in earnest after the holidays and that a settlement would be reached on a 4 to 41 per cent level after the offer of selective import controls. It always seemed to me that the Chancellor had made a mistake in putting the union leaders in a tight corner by broadcasting his 3 per cent wage limit in the budget speech. He was bound to get a nasty response and this was bound to upset the foreign holders of ster ling. We have, in fact, seen a flight from sterling which has put the dollar exchange rate down to 1.84, a fall of nearly 10 per cent since February. Sterling's weighted depreciation against major currencies since the 1971 'settlement' is now about 37 per cent!
Another tactical disadvantage the Chancellor incurred was in having to show to the foreign holders of sterling in his Financial Statement the results of implementing the conditional tax concessions he has offered the unions. The taxes on income would go down after the budget changes by about £1,000 million—from £20,514 million to £19,538 million. It will certainly strike the foreigner as extremely rash and improvident to relieve the nation of £1,000 million of taxes when we are not paying our way abroad and incurring huge debts to meet the deficit. Still, as the British worker feels that he is being over-taxed, and is therefore not putting his back into his work, it may Well be justifiable to lower taxes in order to get a higher productivity out of labour. That is my own view because I always attach more importance to psychology than to financial sums.
.Nevertheless, to a foreign nose the Healey Financial Statement must stink. Instead of cutting public expenditure the Statement reveals that the total current (1976/77) sPending of the public sector goes up from
444,000 million to £51,213 million. Public sector capital expenditure also goes up by 1,000 million—to £13,503 million, so that the public sector borrowing requirement
rises to close on £12,000 million—from
10,773 million to £11,962 million. In other Words Mr Healey is actually borrowing inore to buy wage restraint. It is this awful 12,000 million borrowing-bribe which is Upsetting the sterling apple-cart.
How is it to be explained to the workers that they are as responsible as Mr Healey for this sterling crisis ? I dislike using a simple simile for a complicated situation but going back to the sterling apple-cart the Chancellor is the man driving the cart while the working force of the nation is the donkey pulling it. The Chancellor had to decide in his budget whether to use a stick or a carrot to get the donkey to pull harder. On this particular occasion he has merely threatened to use a stick—in the shape of greatly increased taxation if the deal breaks down—but has dangled in front of the donkey a carrot which does not look like a real juicy carrot but a synthetic one. The situation is now becoming ridiculous. It is making the donkey behave more foolishly than he generally does and it is making the driver of the cart something of an ass.
This is surely the occasion for our new prime minister to intervene. He can rightly say: 'We must stop this nonsense. This is exactly where I came in before'. And so it is and was. When Mr Callaghan became Chancellor of the Exchequer in 1964 there was an immediate run from the £ and this was followed by a further sterling crisis in each of the following years 1965 and 1966, until in 1967 there was an official devaluation. The situation today is, of course, entirely different. In 1964 the £ was fixed and over-valued; it is probably slightly undervalued in dollars if we look at comparative costs of manufacture. The Treasury was certainly right when it said last Friday that there was `no economic justification' for the extent of the fall in sterling last week.
The truth is that we do not need a cheaper £ in order to sell our goods abroad. We want more assured delivery dates, better after-sales service and better quality of workmanship. As the Chancellor said in his budget speech: 'It is a question of producing the right goods, of the right quality, delivered at the right time'. He added: 'Our costs are competitive and we have spare capacity both in resources and in manpower. We are well placed to sustain an expansion which is led by exports'. We certainly would not want any further depreciation in sterling if the trade unions would agree to be co-operative about increasing productivity.
This presents a grand opportunity for Mr Callaghan to address the trade union leaders in his best avuncular style. He must point out to them that Britain is not a socialist island but a mixed economy peninsula in a capitalist world. The foreign capitalists who hold sterling are watching our financial behaviour and if they don't like it they will exchange their sterling holdings for another currency. The central banks alone hold over £4,000 million of sterling and every time one of the oil producing countries receives a payment in sterling it will immediately turn it into dollars, that is, if it thinks that sterling is likely to fall further in the exchange markets. The prime minister must tell Mr Jones, Mr Scanlan and all that every 5 cent fall in sterling will eventually—after nine months or so—put up the cost of living index by a point or two, So the trade unionist is simply making his wife worse off by upsetting foreign confidence in the industrial future of Britain.
It has been the theme of these City comments that in view of the deficit on the balance of payments and the colossal borrowing requirement, which the Chancellor seems unable or unwilling to reduce, the Treasury cannot afford to finance any more socialism, that is, any further extension of the public sector. The capital requirements of the nationalised industries rise this year to £4,683 million and no provision is made for the cost of acquiring the shipbuilding, ship-repairing and aircraft industries or for any further junketing of the National Oil Corporation. As the scale of borrowing goes up, so does the interest charge—this financial year from £4,845 million to £6,461 million. The White Paper on Public Expenditure estimated that the debt interest charge would rise by £1,000 million a year, reaching £7,500 million by 1978/79. If the rate of interest were to rise, as some monetary fanatics are expecting, our national accounts would sink into a financial bog.
Mr Callaghan must make the trade unions see that we are all in international trade together and must preserve our international credit. If they will co-operate, he might well guarantee the official holders of sterling against depreciation and give the bears of sterling a hiding.
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