12 APRIL 1975, Page 29

Inflation versus profit

Nicholas Davenport

Now that England has become ungovernable it is lucky that we have a prime minister who doesn't try to govern. Suppose he had tried to stop the visit of Comrade Shelepin. The opportunity of letting the public see Mr Len Murray and the TUC making fools of themselves would then have been missed. And how right he was not to attempt to stop the fishermen blockading our ports or the Scots invading England by sea! One remembers that the Emperor Hadrian never succeeded in keeping the Scots out of England in spite of a very high wall he built across the northern neck of the country and in the end the Scots became very useful citizens. Overstrong government action never seems to succeed in this island. I am sure that Mr Wilson has realised that the British cannot be taught anything from above — Mr Heath tried and came a cropper — and that they learn best by suffering. It is obvious that the workers will only learn that inflation does not pay by suffering an awful lot of unamployment.

Mr Wilson is clearly aware of this for he is not attempting to "govern" inflation away. First of all he is leaving the desirable moderation in wage claims to a voluntary "social contract" between the TUC and the Government — a hopeless proposition because neither side can enforce the guide lines — and secondly he is hoping that the world trade recession will bring down commodity prices, as indeed it has in most commodities but oil. Whether Mr Healey will attempt to bring in some tricky anti-inflatiofl. tax in his April 15 budget in imitation of the French (who are proposing a 33% per cent reimbursable levy on French companies which have contributed to inflation) remains to be seen. But the risk of this "no-govern" attitude towards inflation is that we may all go bust, or sterling become unacceptable in the exchange markets, before it has time to succeed through suffering the necessary • unemployment. The curious fact is that the equity market on the Stock Exchange, which is continuing to be firm and upward as I write — it has started its Budget account — seems to be confident that we will not all go bust before the "no-govern" attitude of Mr Wilson succeeds in bringing down inflation through suffering. Many businessmen I meet do not share this optimism. They say that inflation is slowly killing them and that their employees are still living in cloudcuckoo-land. Imagine the case of a small company with net assets worth, say, £1,000,000. Imagine it is lucky enough to earn £500,000 — 50 per cent gross — a much higher rate of profit than is possible today. After paying 52 per cent corporation tax it is left with £240,000, out of which it pays dividends of five per cent or £50,000. This leaves it with £190,000 or 19 per cent to plough back into the business. But it finds that inflation has driven up the cost of investing by 20 per cent, so that it is not really earning enough to keep its assets intact. Few companies are as lucky as this one. Most are going bust much more quickly. Some actual examples from recent company reports may suffice to show how serious has become the inflation burden on the company world. In the year to January 31 Woolworth operated on a pre-tax profit margin on sales of 9.65 per cent. (The last quarter was exceptionally good at 13 per cent.) But wages were up 281/2 per cent in the year and unless productivity can be increased the profit estimate is down. Is the trade union concerned interested in raising productivity or will it have to lose more jobs before it begins to co-operate with Woolworth management plans?

Turn to a very successful manufacturing company — Rugby Cement. For the first time in its history profits in 1974 failed to show an increase. Its turnover was up from £65 million to £80 million, but pre-tax profits were down from £101/2 million to £91/2 million. The trading profit margin fell from 18.9 per cent to 16.20 per cent and in 1975 is expected to slip to 11.9 per cent. The rise in wages and in the cost of coal are responsible. It could not raise new money for investment in the market at 15 per cent and make a profit. Thus, cost-inflation takes its toll. Please note the figures, Mr Benn.

Now take our largest company — Imperial Chemical. Sir Jack Callard went out of his way at the annual general meeting to bring home the serious impact of inflation. The cost of new plants and plant improvement for ICI this year will amount to £365 million — £1 million a day. Last year's pre-tax profit was £455 million, but after allowing for price inflation this becomes £332 million, which is not sufficient to cover the cost of the new plants and plant improvement. Please note the figures, Mr Senn.

Mr Benn now calls for an unprecedented programme of new investment in manufacturing industry to save jobs, which he puts at £6,000 million a year — double what we have been spending. What industry is going to invest £1,000 million until inflation is slowed down and the businessmen can see a profit? What is the good of investing anything until the workforce is prepared to co-operate and raise productivity?

In an admirable paper prepared by three Oxford economists — Messrs Corden, Little and Scott, Fellows of Nuffield College — in demolishing the Cambridge Economic School's case for import controls a significant passage is worth quoting: "The central problem of the British economy is the present incompatibility of full employment and stable prices (and ultimately of full employment itself) with the determination of wages by a process of free collec

tive bargaining when some of the bargaining units are so powerful that they cannot be resisted either by employers or by the elected representatives of the people." If the TUC would drop inviting Marxist revolutionaries to London and concentrate on getting the unions to moderate wage claims, take an interest in productivity, share in the profit from it and make. a mixed economy work and flourish, we could embark on Mr Benn's grandiose scheme of investment in manufacturing industry.

We have come to the parting of the ways. Keynesianism plus Marxist socialism which denies productivity and profitability to private enterprise ends in uncontrollable inflation. The Clause 4 socialist experiment, which turned the unions against co-operating with managements in productivity, will lead Britain into bankruptcy. The writing is on the wall. If Mr Wilson still refuses to govern and bankruptcy sets in before the inflation is slowed, perhaps leaders from the shop floor will arise to co-operate with managers and create an economically viable corporate state.