V'NE ECONONV HE @[1111f
Second Thoughts in the City
By NICHOLAS DAVENPORT rr HE City is always afraid of something. It I used to be afraid of doctrinaire Marxist socialism, but the late Hugh Gaitskell dispelled those fears when he boldly asked the Labour party to remove the Marxist Clause 4 from its constitution. (Clause 4 is still there, but the new Statement of Aims of 1960, converting the Labour party to the more democratic socialism of a mixed economy, allows public and private enterprise to work side by side.) Now the City is afraid of the pragmatic socialism which Mr Wilson is thought to be introducing. First, it did not like the setting-up of the IRC (the Industrial Reorganisation Corporation) to finance industrial mergers with state money. (I suppose some of the older merchant banks felt that this was poach- ing a private financial preserve, but I see that Warburgs, who have more than once fought the old Establishment, have lent one of their execu- tives, Mr Ronald Grierson, to be the IRC managing director.) Secondly, it did not like the new selective cash grants for investment in place of the universal investment allowances. The ex- clusion of the service and construction industries introduced the principle of 'Whitehall knows best' —what industries to select for cash favours and what to reject. Finally, it did not like the selective employment tax in the budget because it carried the principle of selectivity by Whitehall a stage further. Once again the service and construction Industries are excluded from the refund or sub- sidy and the impression is created that Whitehall intends to divide the private sector into good sheep and wicked goats—the good sheep, pro- viding the golden fleece of exports and the wicked goats eating' up the seed corn of labour. Apart from the fact that this division can be very con- fusing, seeing that there are many sheep in goats' clothing and not a few goats in sheep's clothing, the City resents the idea that a pragmatic socialist government can subject the private sector to a tax which does not worry the public sector and then divide the private sector into black and white for favourable treatment or the reverse. The end of it all, they say, is the return of authoritarian socialism. Does not a clause in the Industrial Development Bill, they ask, which could make state participation in the equity the condition for a Board of Trade loan, imply nationalisation by the back door? Like the IRC? The curious feature of this attack is that it is aimed at the triumvirate of the' Labour leader- ship which has never stood for doctrinaire authoritarian socialism. Mr Wilson says that he is trying to bring British industry up to date, stop restrictive practices and increase produc- tivity. Mr Brown protests that he is trying to stabi- lise prices and wages and Mr Callaghan swears that he simply means to balance payments on our international account by a certain date. They are, in fact, all trying to solve our payments problem without resorting to a violent deflation of the economy or to devaluation. Their prag- matical approach to the problem involves being 'meddlesome' and .'dictatorial,' as the dictionary says, but it is not socialism by any definition of the word except in so far as it may introduce a greater measure of social justice. While it may hurt some parts of the private sector, it actually helps other parts, even to the extent of cash
grants for investment and cash subsidies for em- ployment. 'State-aided capitalism,' Bernard Shaw once wrote to me, 'is fascism.'
Leaving aside the grumbling of the old City guard against what they regard as pragmatic socialism, it is interesting to observe that the stock market reaction to the budget was a smart rise. The Financial Times index actually rose 12.6 points to 362.7, its highest point for eighteen months. This is understandable, partly because the market had feared an increase in direct and indirect taxation and was relieved to find only a novelty tax, partly because this novelty tax was regarded as inflationary and therefore likely to stimulate the demand for equity shares. If mortgage rates go up, as the building societies intend (from 61- per cent to 71 per cent), if the cost of houses go up, and if the cost of ser- vices and house maintenance go up, as they must, then demands for higher wages and salaries will follow. I thought that Mr Callaghan was a little optimistic in saying that the effect of the SET on the cost of living would be 'well under 1 per cent.'
Second thoughts on the budget will probably see the equity market on the Stock Exchange turn downwards and the gilt-edged market turn upwards. This is because a recession, moderate perhaps but widely .--pread, is now almost inevit-
able. Exports may hold up for the time—cer- tainly while' the American boom lasts, which depends on Vietnam—but it is unreasonable to suppose that the growth of domestic demand-- from investment and consumption—can hold up under the pressure of dear money and savage taxation. Investment by the nationalised industries will increase at the new restrained rate but invest- ment in housing by the public authorities is not likely to grow fast enough to offset the decline in private building. There is evidence that the high cost of building is meeting with stronger buyer resistance and the rising cost of mortgages will not help. Industrial investment may be holding up well but 'a lot of investment comes out of retained company earnings and company profits are now being squeezed quite sharply. The forced loan by way of the SET will reduce the liquidity of all companies for the time being. All this is going to make for investment caution in the board rooms. The consumer may be enjoying his sharp rise in money earnings but the rise in prices is mopping it up and it is significant that the hire-purchase sales of durable goods started to fall in February and continued to fall in March. I cannot see the motor com- panies counting on a strong consumer-buying boom over the next twelve months to support new investment expenditures.
It would be very surprising if Mr Callaghan was not relying upon a moderate recession in domestic trade to help the balancing of our international account this year. But he would jib at a recession deep enough to halt industrial investment and cause massive unemployment. Before such a calamity could come about we would be given cheaper money and an end of the credit squeeze. And no form of pragmatic socialism would be allowed to hold up recovery.
Previous page
