THE ECONOMY & THE CITY
Interest Rates The Two-Tier System
By NICHOLAS DAVENPORT
THE resounding success of the big LCC loans filled me with gloom. Is this the dawn of the social revolution or its twilight? Is the most dynamic housing authority in the world to be saddled with 61 per cent money for a quarter of a century? Higher interest rates mean dearer rents. Dearer rents bring higher wages and prices. Rising industrial costs cut into exports—unless our competitors' costs rise faster than our own. How can Mr. George Brown achieve his stabili- sation of the cost of living—essential for the success of his incomes policy—if the biggest house-builder in the country has to pay 61 per cent for a long-term loan and the building societies keep putting up their mortgage rates?
A Labour government must fight against this social evil. In its election manifesto it pledged itself to introduce a policy of lower interest rates for housing. 'Because of its great importance to the family,' it rightly said, 'housing should be treated as a separate case deserving specially favourable borrowing rates.' These special rates were to apply to 'intending owner-occupiers' and
to 'local authorities building houses to let.' The manifesto added: 'We should like this policy to apply to all owner-occupiers, but unless interest rates generally fall it would be too expensive.' Just because interest rates have risen instead of falling, the government should not abandon its good intentions. Just because it has been engulfed in the worst exchange crisis since the war, and has been forced—through the conventions of the financial system—to raise Bank rate up to the crisis level of 7 per cent, it should not give up trying to introduce 'specially favourable borrow- ing rates' for housing. A start can be made here and now, but until the market long-term rate of interest shows signs of falling of its own volition, the move should obviously be a cautious and restricted one. The government, in other words, should give up the grandiose idea of applying a special rate to 'intending owner-occupiers' and confine itself to providing a special rate for local authorities for, say, 50 per cent of their housing loans. This can be done easily enough through the medium of the Public Works Loan Board and Mr. Callaghan rightly intends to do it.
It should be remembered that before Mr. Butler shattered local authority finance by his dictate of October 1955, borrowing from the PWLB was compulsory for the councils up to 1953 and at free choice from 1953 to 1955. The reason why Mr. Butler drove the councils out of the PWLB—allowing them access only if they were unable to raise money in the stock market or mortgage market—was simply to avoid having to make issues for them 'below the line' in the Exchequer accounts. The result was that while such Exchequer issues fell within five years to nil, the total borrowing of the local authorities was not greatly affected, except that it was made at greater cost and in shorter terms in the mortgage market. The Radcliffe Committee hotly criticised 'the unfunding operations' of the local authorities, which 'have been piling up short-term debt in a way which is clean contrary to the funding policy of the monetary authorities.' It recommended that the Exchequer should pro- vide long-term capital through the PWLB to any local authority 'that is not able or does not want to raise the money it requires in the market on its own credit at a comparable rate.' The government ignored the recommendation.
The wickedness of the Butlerian system of local authority finance was that it drove the councils to borrow short-term or 'at call' because the short-term rates of interest were generally lower than the long-term rates. But not, of course, when there was an exchange crisis and Bank rate was raised to 'crisis' levels. On these occasions 'call money' in the mortgage market soared to fantastic heights—recently over 8 per cent—and foreign money poured into London to the tune of nearly £600 million to take advantage of it all. So a fantastic situation developed. The wretched local councils, struggling to provide cheap homes for workers and bungalows for old people, were made to pay exorbitant money rates and put up their rents simply because the £ was in danger and the 'hot money' mer- chants abroad were demanding their cut. Only the old squirts of the financial world found it reasonable to put the local councils in the front line of the battle for the £. Mr. Maudling thought otherwise and before he left office he had allowed the local authorities to borrow up to 20 per cent of their requirements or £50,000 whichever is the greater from the PWLB at ruling PWLB rates. (For 1965-66 this quota is to rise to 30 per cent.) The councils took ad- vantage of this concession by taking £95 million from the Exchequer in the December quarter— against £91 million in the previous six months because the PWLB kept its rates at 5i per cent to 6+ per cent, although market rates had risen sharply after the rise in Bank rate. The two-tier system of interest rates had, in fact; begun. Mr. Callaghan rightly intends to give it a sharper cutting edge by raising the ceiling from £50,000 to £100,000.
The snag, of course, is the ,excessively high Bank rate which rules today. The Treasury has been borrowing on three-month bills at £6 12s. 6d. per cent and a rate of, say, £5 12s. 6d. for the local authorities would involve a subsidy at the Exchequer expense. The first thing to be done is, therefore, to reduce Bank rate. The sharp im- provement in the trade returns for December— with the promise of a still greater improvement in January as the import charge begins to bite—
make this a possibility for next month. Notice would have to be given to our creditors, but a move in this direction would please the United
States----which did not like putting up its discount rate from 3+ per cent to 4 per cent—and need not displease the Europeans. As soon as Bank rate is reduced to 6 per cent, the PWLB could maintain a £5 12s. 6d. rate for 50 per cent of local housing needs without exciting cries of 'subsidy.' It would be-a modest beginning.
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