19 AUGUST 1989, Page 18


A bridging finance too far, when the pump is not for priming


If we go on like this', commented the local government minister, David Hunt, mournfully on the town halls' decision to haul up the white flag to Nalgo last week, `we are going to get back to those bad old days . . . when we had inflation of 15.6 per cent.' To which Mr Alan Tuffin, who is hoping shortly to take Postman Pat into battle for another ten per cent, replied: stuff and nonsense. 'We are chasing infla- tion; we are not creating inflation.'

And unhappily it is Mr Tuffin who is right. For, as Mr Hunt had himself pointed out, local authorities can pay for their expensive climb-down either by cutting services and payrolls, or by increasing the poll-tax levy on their local voters. So long as they are obliged to choose one or other of those options, then the effect on the general price level is precisely zilch. It is only if David Hunt and his boss, Chris Patten, persuade the Treasury to cough up to spare the Town Halls this painful choice that the general price level is liable ulti- mately to feel the impact. OK, so that is a substantial 'only': one of the less- recognised drawbacks to the 'Community Charge' is that the Government gave itself plenty of legislative elbow-room to 'ease the coming' of the poll tax by direct Exchequer grants. The noises from the Tory backbenches suggest that Mr Patten will need all of it if he does not want to be eaten alive by the backbench 1922 Com- mittee. But these are battles to be fought in the autumn, as the new Chief Secretary, Mr Norman Lamont, completes his nego- tiations with the spending departments in Whitehall.

Meanwhile, Mr Lawson, like Henry King (who had a penchant for eating string), is surrounded by the doctors. To whit, the Bank of England and the Orga- nisation of European Co-operation and Development, both of which have just produced their annual diagnosis of the condition of the British economy. Happily they do not suggest — as did Master King's medical advisers — that 'there is no cure for this disease'. But they do agree that it is going to be a long, hard convalescence.

The Chancellor (whose officials have the opportunity to scrutinise and, if need be, bowdlerise the opinions of these two au- gust authorities before we get to see them) will be well content. The punters in the City of London had been working them- selves up to believe that the traditional cut in interest rates was on the way in time for the Tory Party Conference in October. Otherwise, they have been saying, the building societies, which have not so far adjusted our mortgage rates to the 14 per cent base rate, will be forced to do so, and Mrs Thatcher would not be amused. (The Halifax, the leader of the herd, has promptly responded with the assurance that it is perfectly content with things as they are). Well, perhaps she would not be amused. On the other hand I'm not so sure that the Chancellor would be broken- hearted if the building societies felt be- latedly constrained to increase our monthly obligations. For one of the reasons that our dose of syrup of figs has been so slow to work — and on the sluggishness of the response the Bank and the OECD are both agreed — is precisely that the forces of competition have discouraged the building societies from making us pay up.

The worry is that moods in the financial markets have a nasty way of being self- fulfilling. Hence the unanimous opinion of the OECD and the Bank of England that 14 per cent is, and should be, with us for some time yet must have been greeted with sighs of relief in Great George Street. It seems to have silenced talk of a half per cent cut, for the time being at least.

Indeed, the City of London has some- thing else to worry about: the possibility that the stock market, spurred on by the arrival of the fancy-financed, and highly leveraged bid from the United States (Mr Jacob Rothschild deplores talk of 'junk bonds' — his friend Sir James Goldsmith calls it 'bridging finance'), has lost touch with what is going on in the high street. As this issue of The Spectator goes to press the air is full of foreboding. We are said to be riding for a fall. The latest intelligence this time a survey of membership morale from the chambers of commerce, reflecting the views of small businessmen — does nothing to relieve the gloom.

There are good reasons why we should be riding for a fall. For, as the Bank of England pretty sharply pointed out, com- panies may have had good reason to be generous to their shareholders (and also, to Mr Lawson's discomfort, their em- ployees) up to now, and a great deal more relaxed about high interest rates than the CBI, since profits from the boom have been piling up in their cash-boxes, and they have had no need to borrow to pay for new plant and machinery. But this reflects the past and not the future: whereas the stock market is supposed to be several jumps ahead. The outlook now is for sharplY falling profits, as consumer demand shrinks while unit labour costs rise steeply, and stocks begin to accumulate in the warehouses, and have to be financed on borrowed money. So far, the real pain has been restricted to the retailers of 'white goods', caught by the abrupt termination of the housing boom, and those who made the mistake of thinking that the City was going to need re-housing on the Isle of Dogs. But current record share-price levels are going to need something more substan- tial than `un-bundling' to sustain them in the months ahead.

Timing, of course, is of the essence in these matters. I was one of those who reckoned that inflation was going to catch up with Mr Lawson before the last elec- tion, and we were wrong. Yet catch up eventually it did. Likewise it has become increasingly fashionable to forecast a se- rious break in the stock market in recent months, and instead the market has chalked up new records. But one of these days the Cassandras will be right — as, you might say, they always are, one of these days.

What is striking about the Bank of England's latest assessment, however, is the contrast with its American counterpart, the Fed. The Fed is now openly acknow- ledging that recession (the avoidance thereof) is beginning to replace inflation as its top priority. President Bush's budget director says it should have done so long ago, and he could be right. On this side of the Atlantic the central bank has no such reservations. It does not say that we need not lose sleep about the risk of a 'hard landing'. What it says, in effect, is that if we are going to run out of petrol, then so be it. The pump is not for priming. If I were a shareholder in BAT — which I am not — I think I'd pause before accepting Sir James Goldsmith's airy assurance that any increase in that business's indebted- ness would only amount to dear old 'bridg- ing finance'. Mrs Barbara Castle is not the only one to have discovered that bridges can cost a bob or two.