THE ECONOMY
A miracle from Mr Major would not come amiss
JOCK BRUCE-GARDYNE
Let us, as they say from the Sabbath Pulpit in the Anglican Church, take for our text this weekend some words of Samuel Brittan: 'So long as sterling is stable about its present level against the D-Mark and is expected to remain so, there is no way by Which the rate of British inflation for traded products can long exceed the Ger- man rate.' It is a text worth taking for several reasons. First, because the in-house guru of the Financial Times is always to be listened to. Second, because he currently reflects, I think, more accurately than any Other outside commentator, the opinions of Great George Street. And third — and most importantly — because he is more than a reflector. He also shapes the phi- losophy of our mutual friend the Chancel- lor. What Sam Brittan thinks today Nigel Lawson will endorse tomorrow.
I confessed the other evening to a senior Treasury mandarin that prior to the late election I had urged his patron to extract terms and conditions from the Prime Minister before agreeing to continue in his Present employment in the third term. 'Like joining the EMS?' the mandarin enquired. I admitted that that had not been on my list. It was clear that I had let the Side down. Within the Treasury just now the key priority is to overcome the lady's distaste for participation in the deutsche- mark currency club. Yet if we take Sam Brittan's formula as the rule of thumb by which the Chancellor Operates, and I think we can, then it's not exactly obvious why they should be so concerned to persuade the PM to sign on the dotted line (which, I'd guess, she will not be prepared to do). Admittedly as fellow-travellers with the European ex- change rate mechanism we are not formal- ly entitled to look to the German Bundes- bank to support sterling by buying pounds if the pound comes under pressure. But the Bundesbank has its obligations to help sustain currency stability in conformity With the 'Louvre agreement' between the major Governments and central banks (not to mention its obligations to German trad- ing companies which have suffered grievously already from the strength of the deutschemark.
So the difference is arguably more appa- rent than real. On the other hand if there Should be another violent lurch in oil prices — either up or down — we would from the outside be at liberty to allow the price of pounds in deutschemarks to adjust as we did last year, without any of the hassle of a formal devaluation or revaluation in the European currency club. We enjoy, in other words, the best of both worlds. Why should the Treasury be so mad keen to make of us an honest woman?
So let's get back to Samuel Brittan's formula. It calls for exegesis. Swallowed whole, it cannot very well be faulted. It's when you come to analyse the parts that doubts arise. First, `no way by which the rate of British inflation. . . can long exceed the German rate'. Maybe. But long enough. Inflation expectations in the world financial markets swiftly feed upon per- formance. It would not take many months of rapid inflation in the UK to convince the currency-watchers that sterling was a 'sell'. Which in turn leads to the second snag: 'so long as sterling is stable. . . against the D-mark and is expected to remain so. . . Yes, but expectations change. It's all a little reminiscent of Ronnie Reagan's supp- ly side economics. Cutting taxes may help to stimulate production, and in due course lead to higher revenues. And running in step with a tightly regulated deutschemark might keep our prices under proper disci- pline. In both cases the problem is, how to get there. There's many a slip twixt cup and lip, as the Americans have learned to their cost.
This, at any rate, is the background to the new Chief Secretary, John Major's baptism of fire. The pound is at present trading reasonably steadily in the middle of the speckled band of what is thought to be Mr Lawson's target vis-a-vis the deutsche- mark. The expected tidal bore of Japanese investment into London following the Election has not materialised — the Japanese, it seems, were not born yester- day. So reining in a rampant. pound has not been Mr Lawson's headache. In fact all's 'I'm an alternative jester.' well with the world. If! were Mr Major I'm not sure that I would thank the Treasury mandarins for sending out a message of, if not euphoria, certainly considerable com- fort. He is unlikely to lack colleagues, in his own words 'knocking on my door with. . . ingenious schemes for spending more money' in the next few weeks as the new Cabinet squares up to its first public expenditure round, and on balance it might have been more convenient for him if the reports of revenue from VAT, corporate taxation and the privatisation programme once more handsomely exceeding the Treasury's expectations had been post- poned until the autumn, with the spending budgets safely gathered in. But there it is.
We really should not need to pray for Mr Major. His predecessor last year, John McGregor, gone off to teach the farmers wisdom, or failing that the virtue of divine discontent, had to contend with electoral arithmetic. The Election is safely gathered in, and Robin Butler, the mandarin in charge of public expenditure (a task to- wards which, according to the Whitehall gossips, he displayed an occasionally compaisant attitude), is to higher things. So getting back to the 38 per cent propor- tion of national resources claimed by Whitehall in 1970, Mr Major's stated aim, ought to be a piece of cake. It doesn't look that way. The Prime Minister is into Inner Cities, and the in-fighting between half a dozen Whitehall departments claiming priority of their mistress's eye is calculated to raise the bids from all of them. Buying off Tory backbench terrors of the Poll Tax won't come cheap. Enthusiasm identified at the hustings for more spending on health and education is going to strengthen the arms of Messrs Moore and Baker in the battle with the Treasury.
So, why worry? With the revenue so buoyant a few extra billion on top of the planned £154 billion spending programmes pencilled in for 1988-9 ought to be afford- able. But while there is argument between those who think there is need for monetary policy to be tightened up, and those who favour tighter fiscal policy, you need to be something of a cock-eyed optimist to be- lieve that, with the fastest-growing eco- nomy in the western world, we can let them both hang out. Unless Mr Major can achieve miracles, Mr Brittan's faith in fellow-travelling with the deutschemark is liable to be put to the test.
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