In the City
Not quite a Tory budget
Nicholas Davenport
The number of Members of Parliament rePorted to be asleep during the budget speech did not surprise me. It was the most prolix budget—some 120 pages—that I have ever had to read and only a Chancellor of Mr Healey's tough physique could have delivered it in twohours and ten minutes. And only one of his courage. It needed a brave Labour Chancellor to lecture the trade union leaders O n the only way out for Britain's inflation, that is by `maximising output and productivity'. As they could only hear snippets. of the speech, being shut off in broadcasting studios, the TUC bosses took immediate umbrage against his proposal for limiting the next voluntary pay restraint to 3 per cent In return for complicated tax allowances. It Was obviously a tactical mistake to bargain with them in public. But Mr Healey has never been the most tactful of men.
The industrial share market on the Stock Exchange responded to this budget with a cautious rise. It should not extend the rise unduly until it knows whether the trade unions will accept the 3 per cent limit and that will not be known for another month. But the measures which the Chancellor is taking with or without that acceptance are sensible measures which should encourage companies to expand investment. The most IMPortant is that he is extending the tax reliefs on stock valuation for two more Years (and perhaps indefinitely) and continuing the 100 per cent capital allowances for fixed investment. The rates for corporation tax remain unaltered, except for small companies which will have some reduction, but the continuation of stock relief and the present system of capital allowances mean that substantially the whole of any profits vv. /Itch a manufacturing company reinvests Its business will effectively be relieved irorn corporation tax. Next in order to help companies raise 'elan finance in the capital market the Chancellor is abolishing the 2 per cent stamp duty (foolishly doubled in 1974) on all fixed interest stocks except convertibles. Mr lie.aleY happily congratulated the City on raising £1,500 million in equity capital last Year of which over £700 million went to ,manufacturing industry. (This helps to give the lie to ignorant trade union leaders who Pretend that the City starves industry of caPital.) He reminded businessmen that a substantial part of the additional £1,000 million Provided for Finance for Industry is still available and promised to consider permanent schemes for encouraging counterYClIcal investment (such as making clearing ,15ank medium-term loans eligible for reFinance at the Bank of England). He is also
adding £40 million to the £285 million already allocated to industry for accelerated projects under the Industry Act. Finally, by halving the higher rate for VAT (down to 124 per cent) he has given a fillip to boatbuilders and makers of electrical consumer durable goods.
All these schemes are undoubtedly helpful to the business world. What is more the Chancellor ended by giving an assurance that when the Price Code expires at the end of July the Government `will take full account of the needs of industry and in particular of the need to allow a sufficient recovery of profits to encourage the new investment we need and the new jobs which the investment will bring.' Surely we now have a Chancellor who wants to see the profitability of the private sector restored— and the bull market on the Stock Exchange maintained. Not of course for sordid reasons but to encourage the raising of new capital through the Stock Exchange machinery. And Mr Healey gave several encouraging items for the bulls.
The recovery in the world economy is under way and he expects this recovery to continue in 1976. The tide has turned. He estimates that total output in the UK will grow by about 34 per cent in the next twelve months. The strong elements of demand he said would be exports which might grow at perhaps 9 per cent under the impulse of expanding world trade. Private consumption would be rising at only 14 per cent; but we have to shift resources to exports. That is why he has rejected any general reflation of the economy and has presented `an almost neutral budget'. It is, I fear, too good to be completely true.
The market which will not respond enthusiastically to the budget is the gilt-edged market. It is much more concerned about the weakness of sterling. On the Tuesday morning the £ was slipping away to 81.85 and while Mr Healey was making his speech the Bank was having to support sterling in the exchange markets. Last month it used up over $1000 million from its reserves in a support operation and this month it has probably used up another S500 million, which would bring the reserves down to 85,400 million. Foreign confidence in the £ will not be restored until Mr Callaghan has demonstrated in his government an antiMarxist balance. Each vote cast for Mr Foot in the leadership election probably cost us $10 million from the reserves.
Another cause of anxiety in the gilt-edged market is the still huge borrowing requirement which Mr Healey puts at £12,000 million for 1976-77. This includes £700 million for the conditional tax reliefs which the Chancellor has promised the workers if they accept his 3 per cent norm but, said Mr Healey, 'it is well worth accepting some increase in the borrowing requirement in order to achieve a lower rate of inflation.' Most of us would prefer immediate cuts in public expenditure. If you turn to the 'public sector transactions' in the Financial Statement you will find that current public spending has risen to £52,000 million for 1976-77 and public capital expenditure to £13,503 million. Here is a total of over £65,000 million which is over 65 per cent of the total gross national income. So Mr Healey has done nothing to cure the real British sickness, which is the growth of the fatty welfare state, forcing the private sector, manufacturing goods to sell at home and abroad, to less than 40 per cent of the GNP.
And not a word was said about reducing the rate of interest without which we shall never get out of our financial bog. The Financial Statement forecasts the public sector debt interest for 1976-77 at £6,461 million--a rise of £1,600 million on 1975-76. The White Paper on Expenditure stated that interest payments at constant prices would rise by £1,000 million in each of the next two years and reach £7,500 million by 1979-80. Another confession of our advance on the road to financial ruin.
Still, apart from these debt horrors, it was almost a Tory Chancellor's budget; but one which a Tory Chancellor would never have dared to make for fear of confrontation.
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