Second thoughts confirm my first favourable reactions to the Budget.
Hardly was the printers' ink dry on my exhortation to the gilt-edged market to look forward to a re- duction in Bank rate when the rate was lowered one full point—to the market's surprise—from 7 to 6 per cent (the down- ward moves have always been points—at least since 1965). The Treasury's hand was, of course, forced by the reduction in the German Bank rate from 6 to 5 per cent. Botti\cuts were designed to stem the inflow of 'hot' money from the United States where interest rates have been brought down in aid of the Nixon reflation to levels far below the European. So heavy has been the inflow into London—about $800 million last month —that the Bank has been able to lift its gold and dollar reserves to the record figure of over £1,380 million after making an ad- vance repayment to the IMF of $685 million. Yet the gilt-edged market was churlish enough to remain divided, marking up the short-dated and lowering the long-dated bonds. It affects to be distrustful of Mr Barber's monetary policy. It believes that it is not firmly enough anti-inflation.
Here I would presume to come to Mr Barber's defence. The hard-money fanatics who object to any lowering of our exces- sively high rates of interest—War Loan is still yielding nearly 9 per cent---are generally bankers and brokers who believe that the real rate of interest, that is, after .deducting the current rate of price inflation, is in- sufficient to support the rentier. But who wants to support the professional money- lender? Is Sir Sigmund Warburg in need of public assistance because his merchant bank can only lend in real terms at, say, 2 or 3 per cent? The fees for professional moneylending are not translatable into real terms. The petty r•entier, if the state wants to encourage him to save, usually gets special terms.
The hard-money fanatics are no doubt angry because Mr Barber has eased up on his monetary policy. He told us in January that a rigid adherence to the Friedmanite money supply theory would be too costly in terms of loss of output, investment and employment. With the unemployed army rising over 750,000, indicating a deepening of the recession, no Chancellor could have acted otherwise. Mr Barber rightly lifted the restriction on bank advances from a 5 per cent to a 10 per cent growth (or rather 2-} per cent per quarter) and allowed the money supply--for what it is worth—to grow at 3 per cent per quarter. I see no inflationary risk in that. Bank advances in the past twelve months increased by less than the 5 per cent allowed by Mr Jenkins and are not likely to jump as long as the deepening depression prevails. As for the money supply Mr Barber has at last dis- covered that a tight monetary policy 'has no special magic for dealing with costinflation'. To bring down the rate of cost inflation the Government is relying mainly on its de- escalation policy in the public sector which
is certainly having some success. As for de- escalation in the private sector, the Ford settlement at 16} per cent looks bad, but a two-year contract guaranteeing steady prod- uction with no strikes allows for produc- tivity improvements. The motor industry apart, the last survey of business opinion by the Financial Times revealed a decline in the estimate of unit cost increases—from 10.2 to 8.9 per cent. Some industrialists re- ported that they had been able to secure lower wage settlements than they had ex- pected. This may be the first sign of a receding tide in the wage-cost inflation. The climate for excessive wage claims even in the private sector is, I firmly believe, becom- ing colder.
When I speak of 'climate' I am, or course, referring to public opinion. Mr Barber is absolutely right when he says that monetary policy has no magic for dealing with wage- cost inflation. But public opinion has. The moderate trade unionist is sensitive to a hostile public opinion and if there is a railway strike or go-slow it will become extremely hostile. The militant trade union- ist who makes the excessive claims is a mental (mindless) case: he is behaving like the 'obstructive psychopath'—the man who refuses to co-operate regardless of the pub- lic inconvenience because he is fed up with rising prices and sick of the competitive capitalist society in which he lives. If you throw him out of work he will become worse. But if you convince him that you are trying to stop the rise in prices—by bringing down Bank rate—and to reduce unemployment—by reflating the economy— there is a chance that he will become more co-operative. Certainly the more moderate trade unionists will respond to this policy if the Government can only bring it home to them.
Did the Budget provide enough reflation? I was at first doubtful, but it may turn out to be just adequate. The tax concessions will cost the Inland Revenue about £550 million in 1971-2 and about £680 million in a full year, but, allowing for various leakages and offsets, the Treasury experts expect that demand will be reflated by the beginning of 1972 by £350 million. To secure a 3 per cent growth of the economy instead of 2 per cent you need a demand reflation of about £450 million but this 'fiscal fine tuning'—to use Mr Sam Brittan's phrase—rarely comes up to expectation during the performance. As the gap between the growth of resources and the growth of output during the per- formance last year was about £450 million there is no inflationary risk in Mr Barber's budget arithmetic. The growth of the money supply which he has allowed will be adequate for the occasion. To quote Mr Barber's speech to the Finance Houses Association in January: 'The monetary policy appropriate to our present circumstances is one that does not passively provide the amount of money that is needed to underwrite the going rate of inflation but something less. Equally, however, it is not one that seeks to be suffi- ciently stringent to curb the inflation by itself'. In other words, it is not a monetary knockout that will kill the wage-cost inflation but the application of common sense, a revulsion in public opinion. That is why the cut in the Bank rate following on the cut in SET is psychologically so important; it should convince the moderates in the trade unions that the Government is really trying hard to bring down prices and improve employment.
So my second thoughts confirm my first-- a good reflationary but non-inflationary Budget. The Financial Secretary of the Treasury, Mr Patrick Jenkin, repudiated in the House of Commons the foolish charge that it was a rich man's Budget. Halving SET and the increased child allowances accounted for £453 million out of the £550 million of tax reliefs. The increase in earned income tax relief would cost only £16 million this year and 415.000 would benefit. The Tory government has in fact, been more benevolent to the very poor and the very old than the Labour government. Mr Barber in my opinion made only one political mis- take—allowing the income of children's trusts to be taxed separately from the par- ents'. That was an unnecessary concession to those who can afford public schools.
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