The Budget
A monetarist answer
Nicholas Davenport
There were no real surprises in the Budget. It was pretty well what we had all expected because no budget in my memory had been so well leaked beforehand in official quarters. I had plumped for £2 to £24 billion of tax cuts and a small increase in public expenditure. What we got was £2,150 million of immediate direct tax concessions -a total stimulus of £24 billion in a full year — together with small increases in health, education, training and environment services Which have all been met out of the contingency reserve of £750 million. It was not expansionist enough to suit the TUC or the CBI except in the matter of small businesses. It did not restore incentives in top management. It was not strict enough to Please the rigid monetarists, although it Went their way. In fact, it was not a budget that could make anyone jump for joy except the few people who still try to make money out of playing the Stock Exchange. There Was an unexpected relief on capital gains. Net gains which do not exceed £1,000 are Rot to be chargeable. When net gains do not exceed £5,000 the excess over £1,000 will be charged at the reduced rate of 15 per cent instead of 30 per cent. A very late admission that with inflation raging any tax on capital gains is extortionate.
The speech, delivered at a rattling pace Without a pause for embellishment or light relief, impressed me by its caution. The usual suppression of economic truth was not overdone. Our financial position, the Chancellor said, has been 'transformed'; the Money supply was 'under firm control' and We had `exceptionally high reserves'. Certainly our financial position has been transformed by North Sea oil but our money soPPly, according to the monetarists, is not Under firm control and our reserves are largely borrowed money. (We are repaying debts ahead of time to the tune of $3 billion). In 1977-78 our money supply, said Mr Healey, was probably just about the 943 per cent target and for 1978-79 he is setting a range of 8 per cent to 12 per cent
With six-monthly 'rolling targets' so that if the counter-inflation policy works out he Alight reduce the target in the autumn. I bet he won't.
I think the Chancellor talks this monetarist language because it impresses the ignor ant and may frighten off the trade union boys from extravagant wage claims, but he must know that if you are going to control the economy by numbers, the numbers have to be deadly accurate, which is something that cannot be said of the M1 and M3 cal culations. 'In so far', he said, 'as it is possible to identify the sort of factors which may cause fluctuations (in M1 and M3) I would expect growth (in money supply) to be higher at some stages in the first half of the year than in the year as a whole'. He was obviously expressing some scepticism of the money supply rules but he bowed to the monetarist argument that interest rates have been too low to satisfy the recent rise in M3 by telling the Bank of England to raise the minimum lending rate immediately from 64 per cent to 7f per cent. It was quite unnecessary and will inflate costs. But as this has already been discounted in the gilt-edged Market — the monetarists wanted 84 per cent — I do not anticipate that it will have much effect upon gilt-edged prices.
A rise seems the more likely when the market absorbs the Chancellor's calculations of the PSBR (public sector borrowing requirement). Last year's outturn was £5.7 billion — nearly £3 billion lower than the Treasury estimate despite the cuts in taxation during the year. His estimate for 1978-79 is £84 billion or 51 per cent of the GDP. I expect this year's outturn will again be below the estimate — the cash limits are still operating — but, said the Chancellor, even if it is as high as the estimate the higher level of gilt sales needed to finance it will be counter-balanced by the reduced need to offset money (capital) inflows across the exchanges. These will be much less than the substantial capital inflows of 1977-78.
The funding of the PSBR outside the banking system will be helped, the Chancellor added, by direct sales of certificates of tax deposits to companies and of National Savings to individuals (a new issue was announced), so that the forecast requirement of new `tap' issues will probably be the same as the sales achieved in the last two years — and somewhat smaller, he added, than the institutional funds likely to be available to meet them. 'Thus I foresee', he added, 'no difficulty in financing the PSBR for 1978-79 consistently with the new monetary guide-line of 8 per cent to 12 per cent.' This is the strongest tip that has come from any Chancellor for us in the City to get bullish of the gilt-edged market. But, of course, the Chancellor was talking his own book.
The extreme monetarists will, of course, reply that the Chancellor is being too optimistic about reducing the rate of inflation. Over the past ten months the monthto-month increase in inflation has been running at an annual rate of below 8 per cent. The year-on-year inflation rate, said Mr Healey, is likely to reach 7 per cent in the early summer and remain fairly steady for the rest of the year. I wonder whether he has made sufficient allowance for the fall in the sterling exchange which has already put up the price level of imported materials. Further, has he over-allowed for moderation in wage claims? He has had no assurances from the TUC about the next round but he claimed that he has helped to support commonsense and moderation in pay negotations by controlling prices and avoiding increases in indirect taxation (except the tax on high-tar cigarettes). I fancy that the gilt-edged market tone will therefore depend largely on the inflation outcome and Mr Moss Evans and all.
As for the equity markets the Chancellor has not provided many bull points, except for the reduction in capital gains tax, but enough to cause an immediate rise of '7 points. He estimates that his stimulus to the economy will raise output by another per cent in the next twelve months, so that the gross domestic product should increase by about 3 per cent at 1970 prices without, he says, re-fuelling inflation or overstraining our productive capacity. This is the highest growth for five years, but it is not really sufficient to turn a stagnating market into a genuine bull market. What makes it lacking in stimulus is that while he keeps the corporation tax and the stock relief plan unchanged he has done little or nothing to restore the incentive of the top managers who, after all, largely decide growth and the tone of the equity market. His tax concessions are directed at the low-paid. The higher personal tax allowances and a lower income tax band on the first £750 of taxable income remove 360,000 people from paying tax and give about £1.58 extra a week to the low paid but the threshold for the 40 per cent tax is only raised from £6,000 to £7,000 and by £1,000 as you go up, so that the £9,000 to £10,000 managers pay 50 per cent, the £11,500 to £13,000 pay 60 per cent, the £15,000 to £17,500 pay 70 per cent and the over £13,000 pay 83 per cent. It has obviously been left to Mrs Thatcher to restore managerial incentives.
The Chancellor began his speech by referring to the world depression — the worst and most difficult since the war as this column has been emphasising — and the need for concerted action to get out of it.
The Healey contribution to the concerted efforts which are to be made by the seven leading industrial nations at their summit conference in July will not rank very high.
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