ECONOMICS AND THE CITY
Borrowing and market pointers
Nicholas Davenport
The most sickening press photograph which has appeared for a long time was that of the British Prime Minister bending low to greet an Arabian prince on his arrival at Heathrow airport. It looked as if he was about to kiss the royal hand or feet. Surely, one asked, he is not going to stoop low enough to ask for another dollar loan? Happily the news came in a few days that Britain and Saudi Arabia had signed a "wide-ranging" agreement for "economic, industrial and technological cooperation" which it is hoped will give British exporters and traders a larger stake in the $160,000 million five-year development plan which the Saudi Arabian government has embarked upon. The wording of the agreement suggested that assurances had been given to the Saudi Arabians about the state of the British economy and the determination of the Labour government to win the battle against inflation.
It was learned from "diplomatic sources" that the question of a loan had not been discussed and subsequently Mr Healey confirmed that denial, but rumour has it that a loan of $1,000 million will be asked for when the
Prime Minister and the Foreign Secretary visit Saudi Arabia in a few months time. II hope this is untrue. We have begged abroad enough. The amount of foreign money we have borrowed to sustain the standard of living which we do not sustain with our own work is now considerable. The Government has raised $2,500 million through the clearing banks and $1,200 million from the Shah of Iran (of which it has so far drawn $800 million). And for the public boards and local authorities it has borrowed $5,750 million a total of close on $9,500 million, of which only $400 million remains to be drawn.
To have to pay over $1,000 million a year in interest charges abroad would be bad enough if we were in surplus on our trading account. But we are in deficit. The deficit on our balance of payments in 1974 was £3,750 million. This year it has been reduced by about half but as the Chancellor said in his Mansion House dinner speech we shall be running a current account deficit for some time to come and for many years will carry a heavy burden of international indebtedness. "Our creditors," he rightly added, "will take a close interest in the way we manage our domestic affairs."
Our Arab creditors and the Shah of Iran will certainly keep a very close watch. The Middle East oil producing countries are holding more than £3,000 million of their surplus funds in London. A large part of them belong to Saudi Arabia. What Mr Wilson, Mr Callaghan and Mr Healey must bear in mind is that our creditors are very conservative people and will be watching not only the battle against inflation but the political drift in Britain towards the communist state. They are as aware as we are in the City that the ,:ontinual extension of the public sector, the nationalisation of the aircraft, shipbuilding and repairing industries, not to mention the North Sea oil, and the development land Bill, are all swelling the monstrous rise in public sector spending which has now pushed up the borrowing requirement to around £12,000 million.
It was lucky for Mr Wilson that his Arab visitors did not attend the Lord Mayor's banquet and listen to Mr Healey's speech. The Chancellor was alarmingly complacent, if not truculent, about the borrowing requirement. He flatly refused to make immediate cuts in public expenditure in the current financial year because the economy was working below capacity and unemployment was still rising. He was, in other words, toeing the line laid down by his left masters.
This complacency was obviously at variance with the views of the Governor of the Bank of England. In his own Mansion House speech the Governor said he was concerned about the trend of money supply growth and the underlying reason for it namely the size of the borrowing requirement. He was particularly worried by the pace at which public spending continually ran ahead of both estimates and intentions. He came as near as he could to saying that it seemed to be out of control. His concern was advertised the next day by the publication of figures showing that in the past three months the money supply by the MI definition had risen at an annual rate of over 20 per cent and by the M3 definition at an annual rate of 14 per cent. The City has begun to talk of an increasing rift between the Chancellor and the Gover-or of the Bank of England.
It was very foolish of the Chancellor to upset the gilt-edged market by his extraordinary speech at the Mansion House feast a mixture of complacency, truculence and class-war jibes for he cannot finance the escalating budget defi cit without inflationary consequences unless he sells an increasing amount of gilt-edged stock to the non-banking public. After the knock he gave it his chances of doing that are lessened, but at the moment of writing the market is trying to recover its lost nerves.
To give the Chancellor his due he did go out of his left-wing way by admitting that "U-turns" in government policy and restrictive practices and over-manning were jointly responsible with poor management and City finance deficiencies for the poor investment record of this country. He did emphasise that the productivity of new investment in Britain was much lower than it is in other countries that the additional output we get from each unit of new investment is well below that of our European competitors and far less than that in Japan. These anti-worker remarks are no doubt preparing the ground for the coming summit meeting at Chequers where Mr Varley, the Energy Minister, is putting forward a programme for the CBI, the TUC and the City to work together for the rebuilding of British industry God knows on what lines.
The City and the Arabs and the Shah of Shahs may not know it but I can tell them that Mr Wilson's secret plan for avoiding the communist state is to move towards the corporate state whereby the CBI, the TUC and the Whitehall machine run a reformed economy. The trouble is that it will mean more bureaucrats with huge indexed salaries and pensions. If they have to borrow abroad to launch the plan I beg them to go to the IMF and write a letter of "good intent" as Roy Jenkins used to do when he was Chancellor. The advantage in borrowing from the IMF is that its terms are cheaper from 4 to 6 per cent and that we don't have to confess to the world that British government-guaranteed dollar bonds are now yielding about 12 per cent against 10 per cent on comparable securities
issued by European institutions whose credit is better than that of socialist Britain. Mr Healey claims that British credit-worthiness has "increased by leaps and bounds.' The bond market does not know about it. On the other hand the equity share market is feeling more confident. If Mr Wilson's schemes fructify we should see the index moving towards 400.
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