Political Commentary
The biggest British crash of all
Patrick Cosg rave Words, Winston Churchill found from the beginning, are amenable things, and can be recognised and understood. But figures, he wrote, 'were tied into all sorts of tangles and did things to one another which it was extremely difficult to forecast with complete accuracy'. And of arithmetical problems he added, 'Just as soon as I managed to tackle a particular class of these afflictions, some other much more variegated type was thrust upon me'. His problem will be understood immediately by anybody who has ever tried to comment sensibly and with consistency on the behaviour of the British economy; or on the evidence which we use to make comments on or predictions about that difficult animal. This week three new pieces of evidence and analysis are available—the annual Treasury report on public expenditure; the Treasury's reply to criticisms of its procedure made by the House of Commons Expenditure Committee; and a distinguished pamphlet, The Problem of Public Expenditure, by Mr Adam Ridley of the Conservative Research Department.*
The three appear at a moment when—as has already been widely noted—an important shift of opinion has taken place in the higher reaches of the Labour Party and the Government. Mr Healey and Mr Jenkins alike have asserted, as Mr David Wood has put it, what 'Labour politicians in and out of office have denied by word and deed throughout the century, that there is a limit to public expenditure . . Thus, another success, partial though it may be, can be chalked up to those Conservative monetarists who have, year in and year out, whoever is in office, argued both that excessive public expenditure is bad in itself, and is the prime cause of inflation. Since both Mr Healey's and Mr Jenkins's statements (taken together with the widespread conviction that the Government, troubled though it is by irresponsible left-wingers, is getting on top of inflation) are being used to support the contention that Mr Wilson and his colleagues, in a prudent if devious fashion, are beginning to resolve the nation's economic problems and prepare the ground for recovery, it is important to stress that the prospects for the economy have never been worse; and that 1978 is, given present policies, likely to produce the biggest British crash of all.
Confusion arises because the critics and publicists of British economic problems— and the public as well—never seem able to keep more than one point in their minds at a time. Thus, a few years ago, the balance of payments provided the sole focus of attention. Then, early in the life of the Heath government, industrial sluggishness seemed to be the major problem. Next— first triumph of the monetarists this— inflation, and the question of what caused it, occupied the centre of the public stage. Each of these intense debates left a residue of ill-considered traditional thinking— thus, the balance of payments is still discussed without regard to the fact that exchange rates are no longer fixed, large though the difference is that this fact makes to the discussion. Politicians, of course, like one-subject discussions: they can, you see, take measures to deal with one subject— whatever distortions this causes—and then, when it appears that they have been successful, claim re-election.
Of anything the Treasury produces it must simply be said that a Treasury forecast has never been right; and that that department is always more concerned to defend itself than to be objective. This comes out very clearly in the reply to the Expenditure Committee. Mr Ridley, alas, is as much a one-subject man as most—he adjusts his figures throughout for inflation, rather than incorporating that phenomenon in his analysis—but his great triumph is to demonstrate that measures to combat inflation, however effective or promising, do not, even where they involve reductions in public expenditure, do much to solve— and may even make worse—the central British malaise. In examining the measures suggested in the Expenditure White Paper (which, of course, he could only guess at, though he did so with remarkable accuracy) he demonstrates that even after the April budget, the likelihood is that there will be 'a real level of public spending over the next few years much higher than Mr Barber proposed in the 1973 White Paper and significantly greater than proposed in January 1975'.
Mr Healey and Mr Jenkins have merely been rationalising a fait accompli when they argue that public expenditure cannot safely rise above 60 per cent of national income without disastrous effects; for that is the level at which it now stands. Mr Ridley's contention is that economic recovery demands that it must decline very much below that figure if any permanent recovery is to be expected. He (rightly, in my view) takes as read rather than expounds what is now the monetarist truism that the control of inflation depends on monetarist restraint ; and emphasises that the sensible move of relieving pressure on the economy by floating the pound was not by itself enough to resolve major problems when he says (as some of us argued at the time) that current and depressing trends cast 'very serious doubts on the efficacy of a depreciation of the exchange rate not complemented by specific domestic policies' (my italics).
His major—and, in my view unanswerable—proposition is that high public expenditure ruins the economy, destroys incentive and investment, and reduces Britain to an economic backwater. Most of the damage, moreover, has been done in the last decade, though the share of Gross Domestic Product taken by public sector spending, having been on a falling trend to the late 1950s (in spite of the growth of the Welfare State), has risen steadily since then. Throughout, our public sector has taken more—and now an increasingly larger proportion—of national product than other OECD countries. In particular, from 1960 onwards, taxation and social security payments have taken an alarmingly increasing proportion of personal income, thus leading, among all classes, to inbuilt demands for higher wages: it was their failure to stop this trend that constituted the most significant political error of Mr Heath and his ministers. This has produced a tension between the wish of the individual to sustain his personal spending and the wish of government `to sustain its growing control of our national resources . . The tension has been resolved at the expense of the resources—for profits and development —of private' business, and this is what, above all, has destroyed our international competitiveness. In a deadly sentence, Mr Ridley foretells the future: 'As long as such trends prevail it can only be a matter of time before the inroads of imports into our home markets eliminate more productive capacity than the growth of our exports can support.' So it can be argued', he concludes, 'that there is a strong causal linkage between the many apparently unconnected economic ills from which we suffer. The growing burden of public spending provokes in quick sequence inflationary pressures, the decline of profits, cash flow, liquidity and investment ; deindustrialisation, a weakening trade balance, higher unemployment (structural unemployment more like that of a developing than a developed economy); and before long serious weakening of national selfconfidence.'
What the Government has done and proposes to do will not alter any of this. The partial measures now in train will, as usual, produce a boomlet, to be succeeded by another inflation and another depression. Massive reduction in public expenditure is not merely needed to control inflation. It is the sine qua non of economic recovery, and nearly all the measures proposed by government—Mr Healey, after all, is curbing only the rise in expenditure, not the thing itself—which are aimed at stabilising labour situations, act against it. The White Paper is merely another step on the road to the biggest crash.
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