20 DECEMBER 1975, Page 28


Advice to the Bank

Nicholas Davenport

The economic commentary of the Bank of England Bulletin is much more readable than that of the National Institute of Economic and Social Research, being less couched in economic jargon, but I hope that one day soon a summary of it will be written in good plain English so that our trade union leaders, and workers too, could learn from it and understand the hard facts of economic and financial life. For they all remain hopelessly ignorant. Trade union history has taught them to believe that capitalism stands for the exploitation of the working class did they not create the Labour Party for the purpose of destroying capitalism constitutionally? and that productivity schemes are just another managerial trick of exploitation. Now, having destroyed the British motor industry through persistent strikes and refusal to co-operate generously with management, they believe that the Government can and should pour in millions more of the taxpayers money to keep it alive. How tragic to be so bemused by one's history as to believe such flagrant nonsense!

"A persistent public sector deficit of the present magnitude," says the Bank of England Bulletin, "could make it difficult to finance an adequate proportion by sales of gilt-edged stock outside the banking system." If only this warning could have been expressed in terms intelligible to the working man! I don't suppose that the Government's subsidy of British Leyland and Chrysler will add significantly to the huge borrowing requirement, which, as the Bank remarks, amounted to £2,700 million in the quarter ending June and to £2,500 million in the quarter ending September. (The Central Statistical Office now gives the figures as £2,829 million and £2,762 million respectively.) A budget deficit of well. over £10,000 million, which is not to be reduced for another financial year. has already reached danger point. It would, indeed, be unmanageable if the private sector you and me had not massively increased our personal savings by refusing, to spend as much as we used to do when prices were reasonable.

, How the Bank of England financed these huge deficits without breaking the gilt-edged market is something of a miracle. It did it by borrowing abroad (not to mention a nice balancing item of £500 million), by drawing on the reserves, by selling over £1,700 million of 'tap' stocks and £400 million of Treasury bills to the non-bank-public (the yield on Treasury bills became relatively attractive) and by borrowing the rest from the banking system up to about £2,500 million which is potentially inflationary. Happily no one wants to draw on the banks money-flush at the moment for any. speculative purpose. In the present quarter the Bank has been able to increase its sales of 'tap'

stock in the gilt-edged market but the market is still feeling uncertain despite Mr Healey's reassurance that the mounting borrowing requirement is "still running at a rate well inside the range of deficits of other industrial countries."

The reason why 'Great Britain Ltd' has not already gone bust like British Leyland and Chrysler is that the British taxpayer is a law-abiding chap and pays up. The British Government has not therefore lost financial credibility. If the British taxpayer stopped co-operating with the hard-pressed Inspectors of Taxes it would be a different story. And here is another danger point which the trade union leaders must recognise. If taxation becomes still more unreasonable, as it would be if the wealth tax proposals are implemented, then the taxpayers' co-operation would be lost. Already the taxation of investment incomes is unreasonable enough. To allow a widow who has inherited from some hard-working entrepreneur £20.000 a year to keep only two pence in the £ is absurd. She is bound to leave the country. What is worse, her perhaps clever son, perhaps a wealth-creating business genius, would have to follow. The distribution of wealth and the taxation of wealth have already tiroceeded far enough to endanger our industrial future. The preposterous idea that some trade union leaders nurture that the Government must reflate the economy massively to stop unemployment rising further, get the money for it out of increased taxation and impose a seige economy shows that the ignorance of some of them has become a dangerous form of madness.

Mr Healey does not have to be told these

elementary facts of financial life. He knows it all and has already begun to preach to his trade union supporters the importance of co-operating with managements and improving profit' ability. He said bluntly in a Sunday Times article that you cannot expect industry or the City to invest unless it is confident that it can earn a reasonable rate of return. The Bank of England Bulletin reveals that it is no longer reasonable. The rate of industrial profit net of capital depreciation had fallen in 1974 to less than half what it was in the early 'sixties and had now fallen "so low as to leave little incentive to new investment." Whether companies can get the workers to co-operate in making new investment more profitable without giving them a share in the profits which is best done, as have so often said, by means of a public unit trust remains very doubtful. It was depressing to read that a multi-national manufacturer like Ford Motor has found that the productivitY of their plants in Europe was higher than in England although the machines were identical because British labour did not get so much out of them.

Much, therefore, depends on whether the Government can get unions to co-operate when they have finally got the rescue of Chrysler over the financial hurdles. It was not reassuring to hear that the rescued Leyland had alreadY been forced to stop spending on new machines because the labour force was not paying its way. But I must end on a word of advice to the Bank of England. They must not attempt to sell more gilt-edged stocks to the public by putting up the 'rate of interest. Dearer money is price-inflationary and higher rates will not keep foreign funds in sterling if we behave foolishly. Private, non-bank money will be attracted into gilt-edged if the rate of price inflation is going to fall as Mr Healey predicts, that is, if it is going to come down from 26 Per cent to 12 per cent. It will then pay to buy a long gilt-edged stock which is at the moment yielding nearly 15 per cent. If the trade unions agree to another twelve months of pay restraint we could see quite a boom in the gilt-edged market.