MONEY AND THE CITY
The reactionary Bank and the reformist Chancellor
The Editor stole the good joke before I 'had time to make it — that the Chancellor had put up Bank rate by abolishing it — but he went on to make what I thought was a bad joke — that Mr Barber would next increase income tax by reducing it. Mr Barber intends, of course, to reduce income tax by increasing the yield through growth. But first let me deal with the decision to abolish rates, which is not such a good joke as it appears. The decision was surprisingly well received, Only the Economist regretted it and called it a vulgar short-term expedient, but then the Economist has to honour the principles of Walter Bagehot's English Constitution. Technically Bank rate is the minimum rate at which the Bank stands ready to lend to the money market. But since early September the Treasury bill rate has been moving above the 6 per cent Bank rate and reached 6.6 per cent last week. Obviously the Bank could not allow the discount houses to borrow at 6 per cent and make a killing by buying Treasury bills at 6.6 per cent. So it portentously abolished the 'I'nursday Bank rate proclamation and declared that in future its last resort' lending rate will be per cent above each Friday's average Bill rate tender, rounded to the per cent above. Accordingly its minimum lending rate has been fixed this week at 71 per cent.
A lot of nonsense is now being talked about dearer money and curbing the excessive growth in the money supply. Mr Barber has no intention, as he said in his explanatory but equivocal statement, of being deflected from his 5 per cent growth target, which is in real terms, and to achieve it I am sure he will let the money supply go hang — and the exchange rate for sterling as well — if it proved to be necessary. The abolition of Bank rate is merely the necessary corollary of the monetary madness of last September when It was decided to remove the ceiling on bank advances and allow the clearing banks to charge what they like on overdrafts and pay what they like on advances. This return to freedom in banking was hailed as a great advance but I have always regarded it as a retrograde step which led directly to the diversion of bank funds to private property speculation, not to mention speculation on the stock market. Mr Barber has said that he will resurrect Bank rate when he needs it. He needs it today because he needs to . convince businessmen that they can go to the market for capital to invest in new plant and machinery at a money rate which will not exceed their profit margin rate. That means bringing money rates down. The Department of Trade and Industry had just published forecasts indicating that capital investment in real terms is expected to be lower in 1972 and 1973 than it was in 1971. It is very wicked of the Economist and other old-fashioned adherents of Bagehot's constitutional idealism to argue that the government in effect prints money to finance purchases of giltedged stock which in their view is too high in price. With nearly a million unemployed and the heavy engineering plants running at 65 per cent to 70 per cent of capacity there is an excess of savings in the economy and any government worth its salt would be directing a portion of those savings, which accrue in the 'hands of life and pension fund managers, into the giltedged market in order to keep borrowing rates down. To get 5 per cent growth in real terms we need less freedom in money and more direction. That will bring lower, not higher, money rates. I half believe that the gilt-edged market agrees with me, for it has kept its head and nerve in spite of the retrograde steps of the Bank.
There is nothing retrograde about the Green Paper on 'Proposals for a TaxCredit System.' It is the biggest advance since the Beveridge report. It is, as the authors Mr Barber and Sir Keith Joseph claim, the biggest reform of the tax and social security system ever attempted. It is also overdue and it is absurd to say that it cannot be in operation for five years. The fact that everyone is presumed to be better off marginally as a result of the reform is not a sufficient inducement for , people to vote Mr Heath in for another five years in 1974-75. We have had to endure too long the administrative division between social security and income tax which necessitates an enormous duplication of staff. Indeed, if the reform is implemented we can dispense with 10,000 to 15,000 civil servants. The anomalies created by the existing system are really too exasperating to be suffered for another five wears. For example, a man can be worse off by working than if unemployed because he will lose certain social security benefits. Again, a man can lose social security benefits if he works harder, or with more skill, and increases his income.
The existing system of PAYE with its hundreds of different codes to match the dozens of different tax allowances is so complicated that very few people can understand it. The sensible proposal is to abolish it entirely and introduce a standard rate of income tax of 30 per cent which will be offset by certain tax credits — £4 a week for a single person, £6 per week for a married couple and £2 per week for each child. Thus, if a married man with three children had an income of £40 a week his tax liability would be £12 (30 per cent of £40) against which he could set tax credits of £6 plus £6 for the three children. So he would pay nothing. If he earned less than £40 a week and the credits exceeded his income 'he would receive the difference in cash from the State. So we get what is called the negative income tax' for poor people. One might say that technically the less you earn the better off you must be, but we have not yet reached the blissful condition when the State pays you for not working at all.
There are, no doubt, over-simplifications in the reform and some resulting ccmplications, especially in regard to married women at work. Allowances for each child are identical and no differentation is made over the age of the child. (The hideous thought occurs that it may encourage child-bearing.) Initially the selfemployed are excluded which is another complication, but the pensioners are in, and three or four million pensioners will have their income significantly improved while hundreds of thousands will no longer have to claim supplementary benefit. The reform will, in fact, lift about a million people out of the net of supplementary benefits.
The annual cost of the reform amounts to £1,300 million because of the levelling up of the benefits to children, and the credits paid to those below the tax threshold but Mr Barber expects to meet this extra cost through the fiscal dividend,' that is the tendency of tax revenues to rise faster than the national incomes. I think those who ridicule Mr Heath's attempt to get a voluntary incomes policy by consensus at the tripartite talks at Chequers fail to appreciate that this has never before been attempted in an atmosphere of economic growth instead of deflation and with tax reliefs instead of tax increments. In two years this Government has reduced taxation by over £3,000 million before this great tax reform was conceived. Surely that entitles it to a hearing among men of good will.