Cruel only to be kind
The new Chancellor certainly impressed the City by his courage, his competence and his cruelty. No one was spared. Not even the millionaires to whom budgets usually do not matter: they will have to write out a cheque for about £10,000 for every million. Not even the poor : the cost of living will go up by 3 per cent and wages will virtually be frozen. Not even the Cabinet: the fearful price we are now paying, he says in effect, is the cost of running the economy for three and a half years in an incompetent way. The only people Mr Jenkins was kind to were the foreign bankers who had lent us money. It was, in fact, a desperate budget primarily designed to save the pound from a further devaluation over the next three months —and to make the present $2.40 parity work. Probably it was a bit too desperate. But imme- diately he could take no chances over the pound while the world monetary system was showing signs of crumbling. That is how the City sees it. It is thankful that we have got a Chancellor who is courageous as well as in- tellectually alert, and is not disposed to repeat the 'little by little too late' mistakes of the past.
The first effect on the Stock Exchange was a marking down of gold shares and store shares and some service trades badly hit by the SET increase and a marking up of manufacturing and exporting shares. There was not a great movement—consumer shares had already been discounting a tough budget—but I expect this recovery in industrial equities to gather strength in coming months. After all, the Stock Exchange had been fearing a total dividend freeze and a further rise in corporation tax, and here is Mr Jenkins allowing an increase of 3} per cent per annum in dividends—even if he is asking companies not to make any increase 'without good reason'—and leaving corporation tax at 42f per cent. What is more he is exempt- ing unit trusts and investment trusts from the 3f per cent dividend rule, which caused an' - immediate sharp rise in the never very free market in investment trusts. What is more again he is expecting—after making his cuts in personal consumption—an average growth rate in the GNP of at least 3 per cent per annum in real terms over the whole eighteen- month period from the second half of 1967 to the first half of 1969.
The faster we export, the faster output will grow and an increase of 4 per cent per annum, he says, is within the range of possibilities. This points to an increase in equity earnings' this year of 10 to 15 per cent for manufactur- ing and exporting companies which have been able to reduce their unit costs and improve their Productivity—and perhaps more next year. So brokers are reading the budget as bullish for select equity shares, especially for the low- yielding `growth' stocks. Dividend restraint has ways been a --feature of equity growth. The millionaires who will be paying in effect a small opital levy will soon be recouping themselves from a rise in the market value of their inveited wealth.
Coming to bonds, there was a sharp improve- ment in both long- and short-dated gilt-edged stocks—and with good reason. In the first place, the gilt-edged market will not have to meet much competition from the issue of new in- dustrial debenture and loan stocks: the immediate domestic recession which Mr Jenkins has engineered will ensure their absence from the market scene. In the second place, the startling reduction in the net 'bor- rowing- requirement' from £1,482 million for 1967/68 to £358 million must reassure even those cynical institutional investors who had given up all hope of the restoration of British government credit. I am sure the gnomes of Zurich had not expected the Chancellor to be so ruthless in his borrowing cuts.
Here I must explain that the Treasury has changed its borrowing technique. Instead of showing loans from the Consolidated Fund as capital items 'below the line' in the budget account, the surplus of revenue over expendi- ture is paid into a National Loans Fund which will4replace on April 1 the Consolidated Fund as the main source of government lending to the nationalised industries and local authorities. (The figures do not exactly match the old loan from the Consolidated Fund because several small loans will in future be met from Votes.) If there had been no changes in taxation the bor- rowing requirement would have been reduced from £1,482 million to £1,129 million but the net result of Mr Jenkins's swingeing new taxa- tion of £766 million (£923 million including those announced before the budget) is to swell the surplus to be transferred to the National Loans Fund from £640 million to no less than £1,388 million, thus reducing the net borrowing to £358 million. Nothing like -it has been seen since Mr Gladstone's day.
The gilt-edged market is therefore bound to attract investment from institutional funds. But not so much from speculators. Mr Jenkins has withdrawn a privilege which used to attract the 'spivs.' Mr Callaghan had introduced the neutral or tax-free zone to exempt from capital gains tax those who had acquired stocks issued at a discount provided they were acquired at that discount or above. The main benefit of that exemption had gone to 'traders' who deliberately bought and sold within a period of months in order to secure the interest on the stocks in tax-free form. So Mr Jenkins has withdrawn the exemption as far as short-term tax is concerned, although it remains as far as long-term capital gains tax is concerned.
But the gilt-edged market is no longer de- pendent on 'spiv' operations. It can look forward to a rise based on sound long-term investment. It can really expect an inflow of savings. There was therefore little to justify Mr Jenkins's cynical attempt to attract savings *by offering bigger prizes on Premium Bonds and supporting the move to introduce a national lottery. He was on holier ground in raising the limit on the current issue of National Savings Certificates from £750 to £1,000. Last year this issue, which offers a grossed-up yield of 71 per cent, attracted £60 million. (The total invested in National Savings Certificates is £2,000 million.) But what a Mass of new savings the Chancellor could attract if he were to offer a National Unit Trust cerlifi- cate now that he has improved the prospect of industrial equities. It is surprising that he has not given this obviously popular medium for saving a serious try-out.
The City's final judgment has not yet been given but it is inclined to admit that this budget not only gives the economy a chance to recover its balance, especially its balance of payments, but the Labour party a chance to recover its nerve. There is a 'social equity' whiff about`its taxation reforms and even a suggestion that Mr Jenkins might make a mixed economy work.