In the City
The coming Budget
Nicholas Davenport
Taking its cue from Mrs Thatcher the Stock Exchange reacted to the great Conservative victory in a confident but restrained manner. There was no rush after shares. In fact, the first move in the market was downward but later on it improved and pushed the index through its previous high point of 552 With a 6-point gain. I do not anticipate a headlong rush through 600. Indeed, I would say that after the long election rise the market may be overbought. It is clear from the monthly turnover figures that the life and pension funds have been piling into equity shares in the last few months. The turnover in equities in December had dropped to £1,193 billion — this being the total value of all equity purchases and sales on the Stock Exchange — but the turnover rise this year has been remarkable, with a peak of £3,739 billion in March and a total of £2,228 billion in April. No one would now dare to say that the life and pension funds are at this moment under-invested in equities.
There is more scope for a further rise in the gilt-edged market but I expect the fund Managers will wait to see how Sir Geoffrey Howe intends to tackle his first budget, Which will probably be on 12 June. He has a formidable if not impossible task, having Fommitted himself to an immediate cut in income tax and a reduction in the borrowing requirement. His first job is to see 'the books' — to find out what sort of a mess Mr Healey left. I have often found it difficult to believe all that Mr Healey was saying to the House of Commons. He was always able to Make the figures look 'good' because he was always so much cleverer than his audience. He had promised to keep the borrowing requirement at £84 billion but how he could achieve this after the indexation of the income tax allowance and his planned increase in Government expenditure no 00e could understand. He wisely refused to tell Robin Day what his budget plans were and now that he has gone with his grand piano from No 11 we shall never know what sort of tune he was going to play. A pretty dismal fugue it was bound to be.
The Tories have plans, it is said, to change the system of monetary control. For example, Professor Brian Griffiths of the City University has been advising Sir Geoffrey Howe that the clearing banks should be subject to a 'cash ratio' instead of the present 'reserve asset' ratio. But no Chancellor could contemplate making structural changes in monetary controls in the first few weeks of office. What he must do in order to achieve the miracle of a sizeable tax cut is to sell to the non-bank public most of the Government's holding of British Petroleum shares and all of the state-owned British National Oil Corporation, which should now become a holding non-operating company. This has been put forward as Tory financial policy and apart from enraging Mr Benn, Lord Balogh and Lord Kearton I don't suppose the electorate would give it a moment's thought. Indeed, if it meant that Sir Geoffrey could avoid putting up VAT to 10 per cent it would generally be welcomed. I might add that these oil asset sales would not in the least undermine the state control of the development of the North Sea oil fields. It might even promote their development because BNOC has been appropriating to itself the lion's share of the new exploration.
It is good to see that the able David Howell has been assigned to the Department of Energy. I hope that he will soon consider launching the Energy Trust which I proposed, whose units could be sold to the non-bank public to the great relief of the borrowing requirement. The Trust would comprise Coal, Gas and Electricity as well as BNOC and its capital would be something between £3,000 and £5,000 million. If 25 per cent of the units were allocated to the workers — held in escrow until paid for by the dividends — there would be no outcry from the left about capitalist exploitation. The workers would become capitalists and share in the creation of wealth. This I take to be the radical approach of Mrs Thatcher towards solving the old problem of 'two nations'. Instead of confiscating wealth as the lunatic left proposed, she would start redistributing wealth.
This I take to be Mrs Thatchees longterm policy for revitalising the British economy, but the immediate problem is balancing Sir Geoffrey Howe's incometax-cutting budget which can only be done by expenditure cuts and sales of assets. No doubt he will call in business experts to advise on how to run the welfare state with greater economy and less bureaucracy but all this takes time and he will have to be content with a provisional budget and promises for the future. I am glad to see that to help advise him on immediate sales of assets he has as his Chief Secretary at the Treasury my one-time editor at the Spectator, Nigel Lawson, who knows the City better than most, having once been a City editor. I hope he will also advise Sir Geoffrey to take a chance on cheaper money and make an immediate cut in Bank rate. With a strong pound we have no need to attract foreign money to London by offering absurdly high rates of interest. In fact, cheaper money is imperative, for while Sir Geoffrey cannot make the union men work harder and raise their productivity he can certainly induce businessmen to expand and take more risks with employment by reducing Bank rate from 12 per cent to 10 per cent.
The long-term problem facing Sir Geoffrey is daunting and I hope that he is able to sleep well at night. He is up against a wage-cost inflation which Mr Callaghan did his best to stave off but failed to prevent. Although the stronger pound has kept retail prices from rising over 10 per cent the current round of wage claims looks like raisingwage costs by 14or 15per cent— much the same as last year. As we all know a persistent wage-cost inflation squeezes company profits, cuts down investment and slows down the economy and it can only be offset by increased productivity which unionised labour is not keen to offer. It is idle for the new Tory Chancellor to say that he can resist the wage-cost inflation by restricting the money supply, so that companies will be unable to find the money to pay higher wages. This would merely cause more companies to go bust and increase the dole queues. Sir Geoffrey had better forget monetarism and rely on getting a better response from labour on productivity through lower taxes and — more important than lower taxes — through participation in profits. Mrs Thatcher must start wooing labour on these lines. Thank heaven, the Tories have a woman prime minister who feels, who has a heart, who knows about wooing, who is idealistic and optimistic enough to think that she can stop the economic decline of Britain. No male could.
Previous page
