Prospects for the Budget
Nine months ago, when the Chancellor of the Exchequer publicly pledged himself, in his Letter of Intent, to secure an over- all payments surplus of 'at least £300 million' during the current financial year, we did not expect him to achieve it. (Even so we were more sanguine than many, who were sceptical of seeing any surplus whatever.) In fact, as every school- boy now knows, Mr Jenkins will almost certainly beat his target by a margin that even he must find bewildering. The (seasonally adjusted) surplus for the first three quarters of the current financial year alone is now put at £451 million, suggesting a £600 million payments sur- plus for 1969/70 as a whole.
Inevitably, therefore. with the last Budget before the general election only a month away, the Chancellor's colleagues are anxiously urging him to put away his hard slogging boots and get into his Father Christmas clothes, before it is too late. A record surplus is all very well, but the by-elections and opinion polls have proved conclusively (if, indeed, it needed proving) that it is the pound in the pocket, and not the pound in the balance of pay- ments, that determines a government's popular standing. The Labour party has been sacrificing its popularity on the altar of the balance of payments long enough, the, argument runs; now it's time for the balance of payments (which can take it) to be sacrificed for the sake of Labour's waning electoral chances.
And the strong party-political pressure for a give-away Budget is reinforced on economic grounds by the hard-line expan- sionists. led as usual by the National Institute. Unemployment. the Institute argues. is still well above 2 per cent and is likely to rise, which implies substantial scope for a faster rate of economic growth. And growth has been held back for far too long already by the need to put the balance of payments first: now at last the brakes can be removed and some of the lost ground made up.
Yet Mr Jenkins would be well advised to resist both these arguments. In the first place. his £451 million payments surplus in, the last nine months of last year has been achieved in a- rather curious way. For example, it includes a long-term' capital inflow of some £108 million; whereas the normal situation is an out- flow of about that amount. The Treasury's official explanation is that this about- turn was largely caused by the decline on Wall Street; but whatever the reason the normal pattern is sooner or later likely to be resumed—and bang goes almost half the surplus. The Treasury is also sceptical of the extent of the further improvement in the invisible balance in the last nine months of 1969, while as for trade. everyone (even the National Insti- tute) agrees that, with world trade less buoyant. Britain's imports are likely to rise faster than her exports over the next twelve months. So one way and another the much-vaunted surplus may not be quite as robust as it seems.
Moreover, the next few months are scheduled to see the opening of talks with the Common Market—and on the evid- ence of Mr Wilson's own White Paper these talks, if successful. could lead to a sizeable 'short-term' weakening of Britain's balance of payments. Mr Jen- kins's anti-Market enemies accuse him of seeking to hoard his surplus like a squirrel. ready for the day when he can hand it over to the Six as Britain's entrance fee. But whether this is so or not, one thing is quite clear: even foreign holders of sterling can read White Papers. and Mr Jenkins and his advisers know full well that if they allow the accompaniment to the Common Market talks to be a markedly worsening balance of payments —even if it starts from a position of great strength—then there could be very heavy pressure on the pound indeed.
But cogent as the balance of payments arguments for budgetary caution next_ month may be. the internal arguments are even stronger. We are already in an inflationary situation: the pre-election boom is already under way. fuelled by the mass of wage increases. averaging 15 per cent and more, either recently secured or now in the pipeline. And the Govern- ment's new incomes policy, as exemplified by Mr Short in the recent teachers' pay dispute. is evidently designed to achieve. by direct intervention, even bigger wage increases than would otherwise have _occurred. To introduce, on top of this, a deliberately •inflationary Budget would be Madness.
• The National Institute attempts to justify itself by arguing that wage increases don't really add to demand at all, since they are immediately' cancelled out by price increases. It is a pleasing irony that Professor Reddaway chose the very same week to publish his first report on st4— a tax on employment and hence compar- able to a wage increase—arguing that here was the miracle tax, since it wasn't passed on in higher prices at all. In fact. the Institute and the Professor are almost certainly both wrong: the truth lies between them.
In short, any relaxation the Chancellor feels he really can afford in the Budget ought to be concentrated on the money squeeze. The present level of interest rates and the cimtinuation of the import deposit scheme are both undesirable in them- selves and a serious impediment (the lat- ter through its effect on company liquidity to a healthy growth of industrial invest- ment. No doubt Mr Jenkins will, even so. wish to go a little further than this—if only to prove that it is at least possible for a Labour Chancellor to cut taxes. But there is no cause whatever for a give- away Budget—not even on the very nar- rowest considerations of electoral advan- tage.
For it is an illusion to believe that Budgets significantly affect popular opin- ion. If they did. Mr Callaghan's crisis autumn Budget of 1964 and the further tax increase in his 1965 Budget would hardly have been the prelude to a land- slide Labour victory in 1966. It is the economic climate as a whole that matters. In 1966 this was one of buoyant optimism, generated by a torrent of wage inflation. And this is already, once again, under way: and not even a totally neutral Bud- get could stop it.
But in 1966 there were two other factors. First, wages were rising so fast that few worried greatly about rising prices. This is not so today. Second. in 1966. few recognised the precariousness of the pre-election boom they were enjoy- ing: today, after the experience of the past three years. people are more scep- tical: they still have to be fully convinced that the economy has turned the corner. An 'electioneering' Budget next month would merely reinforce fears on both these scores. It would not only be economically irresponsible: it would not even be intelli- gent electioneering.
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