THE ECONOMY
Budgeting in a season of euphoria
JOCK BRUCE-GARDYNE
Purdah has come early in 1987. This is the season when the Treasury keeps a day-book in which visits to the loo by senior mandarins are liable to be logged, and when the weather forecast gets tagged `budget secret' in large red letters: the season when the Treasury, usually most sparing of departments in its use of high- security classifications, goes into hiding. Luncheons in the City are cancelled; the Garrick Club is out of bounds; and Treas- ury ministers make the sign of the evil eye when their paths happen to cross those of a Grub Street hack.
It is, on the whole, a harmless diversion (although it did contribute last year to the unseemingly post-budget spat between the Bank and Treasury over who was responsi- ble for misreading likely market reactions to the introduction of a tax on dealings in ADRs, the certificates by which shares in UK companies were traded on Wall Street without benefit — to the Treasury — of stamp duty). It is of course formally designed to avert the risk of insider trading transacted on the basis of prior knowledge of the Budget's contents, although in prac- tice it has perhaps rather more to do with the desire of Chancellors — and this one in particular — to spring surprises on Budget Day. Mr Lawson has neither forgotten nor forgiven the revelation in the Guardian of his plans to change the tax treatment of life-assurance policies in the 1984 Budget.
Not that all the supercharged discretion dampens speculation. Indeed very much the contrary: in recent days the expecta- tions of the Chancellor's generosity on Budget Day have begun to feed upon themselves to such effect that it looks as though he will have to poke his head out through the thick lace curtains to cry caution, if he doesn't want his Budget Speech to come as an anti-climax. When, at the time of his Autumn Statement, he warned that pounds committed to all the boosted public spending programmes would not be available for tax cuts in the spring we all said 'pull the other one'. But the most that we were looking for was another penny off the standard rate of tax, which might, or might not, be prudent. Now, just three months later, a 2p cut is bottom field, and a 3p cut, coupled with a host of assorted goodies such as the aboli- tion of capital gains tax, non-indexation of the duties on wines and spirits, another increase in the £30,000 ceiling on mortgage interest relief, an increase in tax allo- wances to lift the starting-point for tax by a good deal more than the rise in prices since last year's Budget, and a cut in interest rates thrown in for good measure, all feature in the fashionable forecasts.
Indicted by the Chancellor for my `apprehensive disposition' when I express- ed anxieties about the implications for inflation of his Autumn Statement, it now behoves me to acknowledge that there are more solid grounds for confidence in the background to his Budget judgment than some of us perceived three months ago. In the last twelve months we have experi- enced a 14 per cent depreciation in the general value of the pound, and a 25 per cent depreciation against the most impor- tant currency for our international trading companies, the deutschemark. On every previous occasion over the years when the pound has been cheapened overseas, any potential competitive benefit to British industry and commerce has been promptly squandered in inflaton. Not so this time.
The weakness of commodity prices; the fact that the dollar — in which a high proportion of our imports are priced — has fallen further than the pound; and (not least, though often overlooked) the Gov- ernment's success in busting the concept of the 'going rate' for the annual wage round: all this has meant that most of the value of the currency devaluation has passed straight on to the business sector. Our unit labour costs are visibly shrinking vis-a-vis the Germans and the Japanese, and the latest trade returns provide some tentative indications that our share of markets, both external and domestic, is beginning to respond.
It may be too early to claim that we have already made the shift required from oil back to goods and services. But I think that if I were Lord Aldington or a member of his eminent House of Lords committee, which predicted last year that we faced nuclear winter when the oil revenues dried up, I'd be inclined to send its report for pulping before too many people got round to re-reading it.
That's not all. By all accounts the stock market surge reflects a good deal more than home-bred enthusiasm. There's a lot of international money — from Germany, Japan and the United States — chasing British blue-chips, and understandably so. If you are prepared to wager on the price of oil stabilising around the $18 mark, and a Tory victory at the polls, UK shares are cheap by international standards, and dirt cheap by those prevailing in Japan. These are substantial ifs', no doubt: but they carry heavy money on them for the mo- ment. So long as that remains the case sterling is respectably underpinned.
Meanwhile the consumer boom and strong business profits — coupled with the fact that, while public spending may be projected to grow faster than some of us would wish, it seems to be well-controlled meantime — leave the Chancellor almost awash with unexpected income. So much so that the Treasury is for once engaged in advancing its expenditure commitments, and delaying its receipts (which makes it all the more bizarre that they should be contemplating sale of their remaining shares in BP for no better reason than to fulfil the lagging programme for privatisa- tion proceeds). We would, in short, have to look back to the golden days of Rab Butler in the 1950s to find a Chancellor sitting apparently prettier than Nigel Law- son in 1987.
Yet those of us who seek a cloud to every silver lining are bound to pause and ponder the outcome of the strike by BT engineers. Here was a dispute which according to BT — had made no impact, and which — again according to BT — was likely to cost the business less than the savings on the strikers' wages for many weeks to come. But it was the employers who seemed to be keenest to settle, and on terms which hardly promised the sort of major reform of working practices and overmanning which they had been deman- ding. Whatever else this incident has to tell us, it does not suggest that pressures on employers to maintain restraint of costs are notably effective just now.
So one does not have to be a paid-up member of the Tory Reform Group, or a purveyor of matchsticks to Mr Hattersley, to wonder whether this really is the season for a consumption-boosting Budget. The consumer/credit boom shows no signs of running out of steam, and if in addition non-oil exports are really gathering momentum the pace of expansion promises to be quite hectic enough without further encouragement. Mr Lawson is by way of favouring a 1988 election. Might he not be well-advised to keep something up his sleeve?
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