THE ECONOMY
The Government may have stumbled on a winning formula
JOCK BRUCE-GARDYNE
On balance the inspection of our navels seems rather more constructive. As the great and good were gathering in Bonn the House of Commons was attending to the second reading of the Finance Bill. This is not normally one of the more traumatic occasions of the parliamentary year, but it did produce contributions from two back- benchers who are nearly always worthy of attention: Terence Higgins, chairman of the Treasury select committee, and Enoch Powell. Certainly when I was a Treasury minister with an awkward corner to defend those were the two I hoped would be engaged on other business.
Their arguments on the Finance Bill presented an interesting contrast. Terence. Higgins thinks the Government has changed course: 'We no longer have a monetarist policy in the sense that the money supply is being controlled . . . we now have an interest rate policy.' Enoch, on the other hand, could 'make sense of all the Government's various statements on the assumption that they are following a monetarist policy'. His 'difficulty' was that if the Government are so inclined to beat inflation 'why do they not work the mangle to achieve the Prime Minister's wishes' for stable prices 'sooner than that distant time to which they have been banished . .
Greatly daring, I think Mr Higgins has it wrong. We did have an interest rate policy last autumn — to get them down. It was not a great success (although the Govern- ment's apologists will tell you — with I suppose some justification — that it did marvels for the British Telecom flotation). But for the life of me I can't see an interest rate policy today. An exchange rate policy maybe: and if he had argued that that too is not compatible with monetary priorities he would have a point. But I'd challenge him to show convincingly that if sterling slithered off towards the dollar, or for that matter accelerated to four Deutschemarks, the Bank would not be chasing interest rates to get them up or down accordingly.
At any rate it was Mr Powell who got an answer from the Treasury. He had reck- oned that 'inflationary funding', after two years of contraction, had grown by £1.3 billion in 1984. Not so, replied the Finan- cial Secretary, thanks to 'additional sales of gilts' — i.e. over-funding — the Govern- ment had pulled back a. cool billion last year. Which did wonders to the size of the 'bill mountain', but John Moore wisely left that well alone. What he dicL do was to respond also to Enoch's philosophic 'diffi- culty'. 'The speed at which we get the economy to zero inflation is a matter of judgment. . . . However, the 3 per cent assumed for 1988-89 is a substantial step down from the 5 per cent expected for 1985-86.' In other words, as Enoch re- marked in the words of the poet, 'less by degrees, and beautifully less'.
Enoch's scepticism is understantable. Indeed after Tuesday's horrendous figures for the money supply his faith in the Government's commitment to monetary abatement of inflation may seem almost touching. The figures, we were predictably asured, are 'distorted.' As indeed they are. If you pump out gilts to recify fM3, and at the same time 'assist the market' to avert anything untoward happening to short- term interest rates (so that those of us with houses can continue to get the Inland Revenue to help us foot the bills for foreign cars and holidays) then any corpo- rate treasurer worth his salt will be borrow- ing like mad to make a useful turn in the money markets, which unfortunately ends up by increasing EM3 again. But such is life. The result, at any rate, is that interest rates stay up, and sterling is liable to seem a 'better 'ole' for foreign cash. Meanwhile the budget deficit is slipping. For whereas hitherto the real growth of public spending has been matched by larger than expected growth of North Sea revenues, the North Sea is now liable to turn traitor, certainly if dollar weakness is resumed. Yet it is not beyond the limits of the possible that such a combination of larger deficits and high interest rates could actually help to smoothe the path to stable prices.
Admittedly there are three dangers. The first is that if the dollar is really on the slide, impatience to get down the rate of interest will revive. The second is that some bad by-election results (and I think we can safely discount the County Council results for this purpose, they are too remote from Westminster) could lead to attempts at 'pump-priming' expenditure over and above the swollen deficit which the Treasury is probably saddled with. The third is that the Cassandras of the Summit turn out to be correct, and that we are now doomed to lurch into competitive protec- tion.
In logic all three should be discounted. The Deutschemark ought to feel the back- lash from a weakening dollar, when it comes, more than sterling, and since the Treasury has enjoined us all to forget about the dollar rate and steer blinkered by the currency basket, that should not pre- sage a stampede to lower interest rates. AS to the domestic political scene, the one clear message to emerge from the shire county elections seems to be that it is still pretty much level pegging between the two Oppositions, so that divide and rule re- mains a tenable strategy. Nor is it any more obvious now than it has been hitherto why protection should appear alluring in the White House when most Americans are doing very nicely out of the eagerness of foreigners to compete for their custom; and with the US economy avid to consume the wretched refuse of our teeming shore and much else besides it would be perverse in the extreme for Europe to take the initiative in putting up the barriers.
But then we do not live in a logical world.
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