THE ECONOMY
Mr Lawson comes full circle?
JOCK BRUCE-GARDYNE
Stockbrokers' economists, it seems, like policemen, get younger every day. Ten years ago they were 'young men' in the eyes of Denis Healey. Now, in the eyes of Nigel Lawson, they have regressed into their teens. Well, I imagine that the likes of Mr Gavyn Davis and Mr Tim Congdon have, with luck, just about reached that stage in life when age regression in the eyes of the beholder becomes a form of flattery. Mr Harold Rose, on the eve of his retire- ment, was reportedly delighted.
Be that as it may, it is possible to sympathise with the Chancellor's exaspera- tion (even though the precedents are not wholly reassuring: ever since Harold Wil- son launched the fashion back in the Sixties with his attack upon the 'moaning min- nies', ministerial denunciations of the strockbrokers' circulars have invariably presaged trouble close ahead). For the same people who are now attributing the deterioration in the balance of payments and tear-away private spending to the Chancellor's generosity with the revenues in the Budget are also predicting the largest Budget surplus ever in the current financial year. And it surely smacks of masochism to argue that the Government should have taken from us even more in tax that it did not need, just to stop us misbehaving. Besides, the obvious reason for anxiety is not that we are spending all our swollen pay-packets, but that we are topping them up with massive loans from our banks and building societies. In other words it is not fiscal policy that is too lax on the contrary, it is tight by any normal definition — but monetary policy.
Hence the most significant pronounce- ment from the Chancellor in recent weeks was one buried in his interview in the Times on 1 July. 'The exchange rate is not so much the anti-inflationary weapon itself, which is monetary policy, but a very powerful reinforcement of the main policy.' The Prime Minister could be perhaps forgiven for murmuring 'I told you so' into his ear. So much for those robust assertions, still fashionable but three short months ago, that so long as we hung like limpets to the deutschmark, inflation could not get us. Taken at face value, in fact, the message to Wapping was that the wheel has turned full circle: we are back to 1979-81. This is where Nigel Lawson came in.
Only can we take it at face value? Mr Lawson has also told us — more than once — that it is 'actions not words' that count. And the actions do not — as yet, at any rate — fully coincide with the verbiage. It is true that base rates are back to ten per cent, with the rate against the mark down to DM 3.12 or thereabouts: just what the Bank of England was, somewhat forlornly, yearning for in its last Quarterly Bulletin. But the lingering impression remains that we are engaged in what our transatlantic cousins call 'snugging' base rates up by half-point steps, so as not to excite the foreign exchange markets. Very skilful, no doubt: but hardly what we did, as I recall it, back in 1979. If the Chancellor wants to put the frighteners on the housing market, something more dramatic is required.
According to Mr Murdoch's other heavyweight organ, the Sunday Times, the Treasury has a rod in pickle: the extension of capital gains tax to the sale of first homes. A likely story. 'Senior Treasury officials' 'were quoted as acknowledging that any such proposition would lead to an `almighty row' with No. 10. Indeed it would. Furthermore it would require a mini-Budget (unless we are talking about Budget '89, which is still rather far away): and as I remarked a month ago, mini- Budgets smack too much of the Healey years for the comfort of the Treasury's own master. I still recall with pleasure a cartoon from the late Seventies displaying the then Mr Callaghan, with his Chancellor, Denis Healey, dressed up as a very Irish-looking lady pushing a pram jam-packed with squalling infants each marked 'mini- Budget'. Mrs Thatcher was viewing the spectacle with disgust, her Shadow Chan- cellor, Sir Geoffrey Howe, at her side. `Disgraceful, Geoffrey', she was saying: 'no self-control.' Mr Lawson would not wish to find himself dans ceue galere.
He has, in any case, gone out of his way to condemn physical and fiscal controls on the credit boom as both 'undesirable and ineffective'. 'Undesirability' is, like the age of City scribblers, in the eye of the beholder. 'Ineffectiveness' is a matter of calculation. The reintroduction of hire purchase controls, albeit aimed at the fringe rather than the core of the credit boom, which concerns housing finance, would, if experience is any guide, be quite effective; if only because those who use hire purchase credit are too unsophisti- cated to get round them.
But Mr Lawson isn't having any. He is putting his shirt on higher mortgage rates to take some of the 'rather fevered de- mand' out of the housing market. Yes, but . . . Because the small investors took a nasty fright on 'Meltdown Monday' last autumn, they are avoiding the Stock Mar- ket, and putting their spare pennies into building society deposit accounts. So the building societies are relishing the oppor- tunity to grab back a market share in the mortgage loan market from the banks. No wonder mortgage rates are proving sticky.
Admittedly there is a fair chance that the mortgage market will come off the boil a bit soon anyway. This is because live-in lovers will, from next month, no longer qualify for mortgage interest relief twice over (why is it, I sometimes wonder, that the Treasury so often gives four months' notice of the chopper coming down? All those shacked-up yuppies have hardly needed Dr Johnson's advice about the effect of impending execution to rush off to their nearest building societies while the going is still good).
All the same, the implication of the Chancellor's latest public statements must be that interest rates have still some way to go — in an upward direction. His dismis- sive comments about the trade deficit surely point the same way, also suggesting that what the CBI likes to denounce as an `uncompetitive exchange rate' will not put him off his stride. If so, while I sympathise with Mr Nicholas Budgen's fears (see page 15) about accelerating inflation, Mr Law- son is now — however belatedly — re- sponding to them. For the exchange rate is indeed 'a very powerful reinforcement' of monetary tightening, as we saw in 1979-80, providing we are not at the same time trying to keep it in station with someone else's currency.
One final comment. 'A premature and simultaneous effort to establish monetary union would seem to me most unwise.' Thus the Bank of England's foreign minis- ter, Mr Anthony Loehnis. That, apparent- ly, puts the troika in harness once again. Chancellor, Bank and Prime Minister with but a single thought: the defence of the sacred independence of our pounds. Only I continue to worry about the fate awaiting Mr Loehnis's boss, the Governor, when he gets down to work upon the European Community's new monetary working par- ty. Rather him than me to try convincing M. Jacques Delors.
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