Thanks for small mercies
Nicholas Davenport
What a relief it is all over! For anyone concerned about economic truth the electoral campaign of half-truths, lies, deceits and concealments was an exasperating experience. How dare the prime minister assure the electorate that his government would not meet the economic crisis by increasing unemployment! If there is a world recession, which seems inevitable, it is not in his power to stop unemployment rising and only a Yorkshire card of the Arnold Bennet genre would attempt to put this o. utrageous pretence over the Ignorant voter.
Of course, Mr Wilson might think that he could keep unemployment under control by spending more public money — there is a Healey promise of a reflationary budget in the autumn — but the increase in the government borrowing requirement which that would entail — it has already been raised from the £Z733 million forecast in the March budget to £3,803 million as a result of the reflationary measures subsequently taken by Mr Healey — would completely destroy the credibility of sterling in the exchange markets, make it impossible to raise any further loans abroad to cover our £4,000 million deficit and send import prices spinning up to the inflationary sky. It was tragic that a hot air balloon should collapse over Birmingham in the election campaign and kill the wrong pilots.
Now it is true that the finance ministers at the recent IMF meeting all agreed that it would be senseless to attempt to deal with the inflationary pressures from which they were all suffering by measures which were likely to produce mass unemployment, but Mr Healey went on to make the following Statement: "I welcome the recent statement of Secretary Simon (of the US Treasury) that though demand would have to be held slightly below potential output in the interests of fighting the problem of inflation massive unemployment was not required, for none of us can hope to avoid disaster if there is a severe recession in the United States." The implication of this warning is that although he would not want massive unemployment Mr Healey would copy Mr Simon by holding demand slightly below potential output. In other words he would deliberately increase unemployment. How then can he justify bringing in a reflationary budget in
the autumn?
Mr Healey must now be asking his expert advisers what sort of recession they expect to see in America as a result of President Ford's new economic package. Not that any of them know. The package in any case will not pass through Congress until after the November elections and if the Democrats increase their voting strength they are not likely to approve the President's proposal that the 5 per cent income surcharge should apply to families with incomes down to as low as $15,000. A street sweeper in San Francisco gets $17,000 a year. Any family below that level can hardly survive on the present price inflation in the American shops. When the package comes before Congress in January we must expect heavier taxation on the rich and on the big corporations whose 5 per cent surcharge is to be lightened by a liberalised 10 per cent investment tax credit. So the American recession must be expected to deepen. Their unemployment rose sharply last month to 5.8 per cent and may go on rising for another nine months or more if the President's proposal to exact $5,000 million more in tax is eventually approved. Now that he has won a tiny working majority Mr Wilson has wisely appealed for national unity which, he says, is his main aim. His party has complained that the business world has not accepted the social compact (let us not descend to the absurd and use the word "contract"). What Labour has got to realise is that while the social compact between the TUC and the Labour government over wage restraint was agreed to because militant unions opposed to restraint could hold the nation up to ransom and make government impossible, so a social compact between the CBI and government is necessary because a CBI opposed to government interference and profit-cutting could also hold the nation up to ransom and make government impossible. It would be useless for Mr Benn to say, "Take the whole lot over" because the Government with its limited manpower and expertise could not possibly run the whole of the business world. Why, even a member of the state Post Office _ Board has lately complained that government interference in the finance of the telecommunications division has made economic and efficient management impossible. I am not appealing to the CBI to declare a general strike but I must draw Mr Wilson's attention to the warnings given by heads of big business who are not unfriendly to Labour. Sir Marcus Sieff of Marks and Spencer has had to cut his company's capital spending back from £28 million to £20 million because its profits from sales up 221/2 per cent have been squeezed by theGovernment's cut in their gross profit margins (now 10.3 per cent) and higher corporate taxation, which falls also on the unreal profit derived from stock appreciation. (Orthodox accounting makes no allowance for the extra replacement cost of stock in an inflation.) Sir Marcus attacked the "misguided interference" by the Government in the retail trade. The Government, he says, criticises the private sector for its failure to invest but omits to explain that much investment is financed out of profits which are now subject to "politically motivated restrictions."
Another warning has come from Lord Trenchard, president of the Institute of Grocery Distribution, who is also a director of Unilever. He saw a flood of bankruptcies ahead which could overwhelm the food industry and cause severe shortages and price rises. The backlog of higher costs was now pressing on the companies and he did not see how food price inflation could be less than 20 per cent in the future. For the Government to cut into the traditional food industry margins of 3 per cent for manufacturers and less than 2 per cent for retailers was, he said, madness. A paper profit before tax of £6 on £100 of turnover could mean a physical loss to a food company replenishing its stocks. No wonder there are gaps on the shelves of the supermarkets as non-profitable "lines" are being eliminated.
Mr Wilson's new government must therefore realise that it will have to do something to restore the profit margins of the retail trade and the cash position of manufacturing industry if the British economy is to be saved. Mr Harold Lever, his financial adviser, is fully aware of the dangers and in the campaign called for a government investment bank to make long-term loans to private enterprise. The tiny working majority which Mr Wilson has now snatched from the electorate should allow the moderates in his cabinet like Mr Lever to exert a sobering influence. on the nationalising extremist Marxists. I take this to be a bull point for the Stock Exchange and look forward to a recovery in both. equity and gilt-edged markets when Mr Healey's "reflationary" budget is introduced, for it cannot fail to come to the financial help of the hard-pressed private sector.
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