Reflation, come what may
NICHOLAS DAVENPORT
Those of us who have been campaigning for reflation week after week were entitled to feel good as well as happy on Monday night. The amount of reflation Mr Barber conjured up to rectify his Budget's faulty estimates was what I had hoped for except in one important particular — a cut in Bank rate. It was not quite up to TUC dreams — a 5/ per cent growth rate — but a little more than the CBI demanded — a 4 per cent growth rate. Depending on your econometrical arithmetic the increase in the national output should work out at between 4 per cent and 4i per cent from the first half of 1971 to the first half of 1972. The cutting of purchase tax by around 18 per cent will cost the Exchequer £110 million in the current financial year and £235 million in a full financial year. The abolition of all hire-purchase controls will give a good boost to consumer demand, which is impossible to estimate as it depends on the new terms offered by the finance houses, but the most important stimulus of all is the increase •in the firstyear allowance on capital expenditure (incurred from now to August 1973) from 60 per cent to 80 per cent together with free depreciation for service industries' immobile equipment in development areas. The balance which Mr Barber held between giving a push to consumption and a push to investment was finely done. We must not forget that in the previous week the Government had announced a £100 million programme for public works in the development areas, £46 million for 'improving older houses and £50 million for minerals exploration. The total stimulating effect, if we include the cuts in taxation given last autumn and this April, is about £1,100 million this year and £1,400 million in 1972-73. Not bad for a Prime Minister who is said by the Opposition to be ruining the economy. Whether a package deal was thought up at the happy, harmonious meeting of the NEDC on July 8, or whether it emerged out of subsequent talks between Messrs Barber and Davies and the CBI is not important; what is important is that the first step towards breaking the inflationary wage-price spiral came from the CBI whose two hundred largest members undertook to stabilize prices, limiting any increase over the next year to 5 per cent. The eleven thousand other members of the CBI are now happily falling into line. So have the managers of the nationalized industries. With this assurance the Chancellor was able to accept the risk of reflating the economy during a raging wage-cost inflation. He could expect no positive assurance from the TUC and it was right not to ask for one. As I have said, perhaps ad nauseam, the working class have been alienated from the rest of the nation by the application of harsh monetary policies which have driven up the price level, slowed down economic growth and worsened unemployment, The Labour ruling clique has been as much responsible for these harsh monetary policies as the monied ruling clique before them. What Mr Heath has to do, if he can, is to reach the mind of the working class and convince them that things have changed, that he is trying to help them and not bash them. At the famous meeting of the NEDC on July 8 it seemed that the TUC were prepared to listen, if not co-operate, and the subsequent meeting between Mr Vic Feather and Mr Barber confirmed that impression. It was good to hear Mr Feather's northern voice on the radio on Tuesday admit to "a change of 'eart " on the Government's part. If Mr Feather will now pick up the new accent, if not the H, and add restraint on wage claims to the reflation programme, we can begin to breathe again and look forward to growth without too much inflation. If there were no response from Labour, Mr Heath would then have public support for introducing statutory control of wages and prices.
The disappointment of Mr Barber's statement was his failure to reduce Bank rate. The gilt-edged market had been expecting it and it would have been the crown of the reflation programme. After food the workers' budget is mostly taken up with rent and rates and these have been pushed up to grievous heights by the inordinate rise in the cost of money. The whole economy groans under the, burden of excessively dear money which actually speeds up the inflationary wage-price spiral. It is not generally known that the Treasury has been able to sell about £2,000 million of government stock to the public this year -to the consternation of the Friedmanites. Here was a great opportunity to bring down Bank rate and reduce the burden of dear money. Why was it missed?
I have no wish to throw bricks at old friends but it does seem to me that the Parliamentary Labour party has been making a fool of itself over its economic diatribes. It taunts Mr Heath for not reducing prices at a stroke — which he has now done. It accuses Mr Barber of being too late with his reflation when it must be obvious that he had to let prices rise to restore profitability and prevent the private sector going bankrupt — and that he had to let unemployment rise to convince the TUC that they were playing a mug's game and not helping their members. It pretends that the economy is too weak for entry into the Common Market when it should know that having got rid of redundant or inefficient or too costly labour most companies are now in a much stronger position to cope with European competition. All they need is extra demand, higher turnover and longer runs in their factories to achieve greater profitability and so increase their investment. This and the confidence to expand they will get now that reflation has come. The alternative economic policy of the Parliamentary Labour party seemed to be to pour public money into the lame ducks of the company world before industrial efficiency had been restored and enlarge that part of the public sector which is losing money. This would merely encourage a run on sterling. Maddening as the Tory government may have been in refusing to have a dialogue with labour before now, Mr Heath has quietly been pursuing a course which will make for a stronger economy whether we go into the Common Market or not. In any case the economy cannot be so weak as the Labour politician makes out if it can achieve a surplus of £39 million on its overseas trade account for June. Mr Wilson used to call this a sign of immense economic strength.
The Stock Exchange has been dis counting the signal for reflation in the past fortnight but it moved into still higher ground this week. The FT index is now 33/ per cent above its ' low' in March and the larger (620) FT-Actuaries index 40 per cent above. This suggests that the bull market should now enter upon a period of careful consolidation.
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