AGAINST INFLATION
It has taken just under twelve months for the Heath administration to establish firmly, and for all to see, where it is most likely to lose the support of the electorate at the next election. However great the effect of the Common Market negotiations, the one area where the present adminis- tration is really vulnerable, and where it is day by day demonstrating its weakness, is on the straightforward and familiar issue of inflation.
How prices rose last week is of much more immediate and universal concern than the apparently remote abstractions of the debate about, perhaps, sometime in the future, going into a rather confused European union. The Government's priorities, however, seem to be the other way round, to such an extent that it appears to have no idea about what to do to stop inflation, and the country is begin- ning to sense this. No wonder, since prices are not only rising fast, but at an accelerat- ing pace. A decade ago inflation could be measured in terms of a 2 to 3 per cent annual increase in the price level. In the last years of the Labour administration the pace quickened to 6 to 7 per cent per year. Now, prices are galloping ahead at little less than 10 per cent a year, and serious public discontent is building up. It is under a Tory administration that people's savings and retirement plans are being destroyed, that the number in poverty grow rather than shrink.
There is no need to make out the case, either on economic or on moral grounds, against inflation. Most people agree that it is an evil. The trouble is that opinion then divides into those (the majority) who have been conditioned into the belief that it is a necessary and unavoidable evil, and the others (a minority) who still believe that it is neither. This minority has to fight its way through three notions which over- lap and reinforce each other in the follow- ing way: to stop inflation, it is said, is possibly not economically desirable, is probably technically unachievable, and in any case, is politically impossible. None of these notions is true, and the last one is baffling. There is no popular support for inflation, just the reverse— hence the promises at the last election. How does it come about, then, that in. a free society, politicians find it so easy to deliver the goods that nobody wants, from groundnuts to Concorde, and never pro- duce anything that everybody wants, like stable prices?
So far the Heath administration has made admirable noises about inflation, but its actions, on balance, have been unhelp- ful. Nothing has been done to cut govern- ment spending, so there's no relief from that quarter. The derisory cuts so far announced; and the changes promised for the future, do no more than slow down the rate of increase of state spending. The pro- portion of national resources passing through the state's hands will be higher, not lower, at the end of this Tory adminis- tration than at the beginning.
In spite of this awesome prospect, taxes are going to come down. The Government has clearly taken a risk in introducing its programme of tax reform before tackling the more urgent problem of expenditure reform. In defence, the Chancellor and his colleagues have deployed the argument that lower taxes will stimulate productiv- ity all round, and so do more good than harm. In fact a better argument would have been to point out that putting up taxes (or social security contributions) has long since ceased to be anti-inflationary, and indeed is likely to have just the oppo- site effect. Workers now look at their take- home pay, not their gross pay, when think- ing about wage claims, and to some extent the current wages 'explosion' is an attempt to win back what was taken away by the last government through higher taxes and contributions. The implications of this are immense. If the country really is turn- ing against the collective provision of wel- fare services as a kind of 'social wage', then the way is open to the reintroduction of charges on a wide scale, There is little doubt that this would be a powerful weapon against inflation.
If the Heath administration's manipula- tion of fiscal and expenditure policy has been contradictory, its handling of mone-. tary policy has been even more confused. The Chancellor's explanations about what he is trying to do have been ambiguous. Fortunately, however, what the author- ities are doing is more promising than what they are saying.
That will help, but the British economy does not work in isolation. Even if the Government were to introduce and main- tain effective policies against inflation at home, there still remains the problem of imported inflation. Specifically, when the American government runs an inflation- ary policy at home, damaging reper- cussions are carried through to other countries via the system of fixed exchange rates. This process has led to acute financial crises in one European country after another. At last the German govern- ment has said, 'Enough, we are going our own way', and by the simple expedient of letting the D-mark find its own level, halted the recent crisis which would otherwise have lingered on for months. The result of this decision has been striking; after weeks of tension, such perfect peace fol- lowed immediately that the newspapers were no longer able to run the story. And the German government bought itself an anti-inflationary policy for the modest price of a 2 to 3 per cent increase in the international price of its currency. The lesson for Britain is clear.
What the Government must not do, of course, is to follow the advice of the National Institute of Economic and Social Research, which, as ever, pursues the absurd line that the cure for inflation is more inflation. 'The state of inflation,' it says, 'ought not in itself to be regarded as a constraint on expansionary policies.' Whether you call it expansion, or reflation, the result is still higher prices, so you might as well call it inflation. Only the weaker brethren amongst financial journ- alists now accept this sort of thing un- critically, and the Times, in support of the National Institute's analysis, excelled itself by calling for an 'export-led reflation', as if our exports depended on the pressure of demand in Britain rather than in other countries. The NIESR now repre- sents the last stronghold of the neo- Keynesians for whom the way to full employment is through the endless depre- ciation of the currency. But this policy, pursued for the last twenty years, of print- ing enough money to pay whatever wage claims the unions put forward is im- possible now that workers are anticipating future inflation when they put in their pay claims. At least the Government has seen through that, and will have none of it, as the increase in unemployment shows. This remains the most hopeful aspect of Mr Heath's economic policy, but it's a long way from a policy which will stop prices going up.
Previous page
