THE ECONOMY
Enter Chancellor surrounded by heffalump traps
JOCK BRUCE-GARDYNE
0 ne of the odder memories of my brief and inglorious incarceration in the Treasury was an occasion when I was told that Her Majesty's Ambassador in Washington wished to pay me a visit. The precise purpose of this visit was (and indeed remains to me) somewhat obscure. But I thought I detected the message that since 'supply side economics' were doing wonders for Uncle Sam, why didn't we try some back in dear old Blighty? I think I gave an appropriately sceptical reply.
The years have passed, but the message, it seems, remains the same. When Secret- ary of State George Shultz dropped by in Downing Street the other day, I read, he gave the Prime Minister a piece of his mine: 'Just let me tell you as an admirer and friend to Britain: you have to cut taxes.' I'd guess he got a rather wintry smile for his pains..
For when the Cabinet assembles at Chequers this weekend the Chancellor is going to say just about the opposite: that unless it takes a collective grip upon itself and its long-term spending plans, taxes are
going to have to go up. It does not take
much imagination to write his sermon. Continuing costs of aftermath of miners' strike — public sector pay overruns - casual largesse from pay review bodies unexpectedly steep increase in indexed benefits this autumn because of 7 per cent of RPI in May — loss of tax revenues from fall of price of oil and dollars simultaneous- ly -- £5,000 million contingency reserve going, going, gone — almost nowt to show by way of savings from the `Serps' review — defence budget coming under pressure whatever Heseltine may say — Common Market agricultural ministers already back to their bad old habits — something must be done!
His audience, it is much to be feared, will display world-weary scepticism. 'It's just Nigel trying to bounce us again,' they will murmur to each other. 'We're being softened up for the Treasury's annual scratch for candle-ends. And at the end of the day, after much bad blood and temper with damn-all to show for it, they'll just cook the books as usual and come up with the figure they first thought of.'
If so, they would probably be wrong. For if the Treasury has up to now, year after year, contrived to conjure up a balance sheet that has not departed too dramatical- ly from its (or perhaps one should say Nigel Lawson's) famous Medium Term Financial Strategy, that has not been because it has induced the spending departments to con- tain their appetites, since it hasn't. It is because it has had a juicy flow of asset sales and deducted them from the calculation of its deficits; and also because North Sea revenues, when worked out in sterling, have not just grown but blossomed. Next year there'll be the first slug of British Gas and by golly it will be needed (particularly if the irrepressible Mr Tiny Rowland pur- sues his personal vendetta with the Depart- ment of Industry by contriving to queer still further the British Airways flotation). For North Sea oil is much more likely to turn traitor.
— And what will the Chancellor do then? Tim Congdon, the stern and unbending and highly respected — chief economist at Messels is in no doubt about what he ought to do. Last weekend he came out with a doom-laden tract for the times entitled The Debt Trap: can Britain escape it?' `The debt interest burden threatens to run out of control. . . . If the budget deficit were to be £2bn or £3bn higher (as the many advocates of fiscal reflation want) the debt interest GDP ratio would rise even more quickly than it has in recent years. Britain would soon be caught in a debt trap similar in kind. . . to that affect- ing Italy and many small European na- tions. . . . To stop the situation deteriorat- ing the PSBR would have to be lowered to at least its present level. . . . A fiscal reflation of £2bn to £3bn would soon have to be counter-manded by a fiscal deflation of £3bn to £4bn' — just in nice time for the run-up to the next election.
So yes, if the Treasury cannot wring savings out of spending programmes it had better raise the taxes, or face the consequ- ences just when they would be most politically unpleasant. All of which would suggest a re-run of 1981, the last time when the Cabinet collectively declined to cut its cost, and the Treasury and 10 Downing Street — N. Lawson, Financial Secretary, `We're endangered by the video boom.' in the van — thereupon insisted, notwith- standing the depths of the recession, that it would pay dearly for its cloth.
Maybe. We shall see. But I've never found the conventional picture of Nigel Lawson as the desiccated ruthless monetar- ist who relishes any chance to grind the faces of the poor (the poor spending ministers, that is) wholly convincing. In- deed it is precisely because he has a better intellectual grasp of monetary theory than any of his recent predecessors that he may be tempted to take risks with it. And this is where the avuncular advice from Secretary Shultz comes into play.
For while Tim Congdon's awful warn- ings about the nemesis that awaits chancel- lors who try to live on tick have the ring of truth to them, his time-scale could be wrong. His 'debt-trap' may indeed be sprung one day: but whether it would necessarily be sprung this side of the next election is less certain. In the short term nowadays the heavy international money slurps towards the port that gives the best return. You pay a hefty price for it, not just in interest but also in what it does to your exchange rate. Which is precisely why Mr Volcker and his US Central Bank are so keen to sweep it somewhere else. They want to see a cheaper dollar to keep their protectionists at bay. For us, by contrast, dearer sterling might logically be deemed to have attractions, as a cure for reviving inflationary expectations and a salutary shock to happy-go-lucky wage negotia- tions.
It would be a tightrope, and no mistake. Were the Treasury to be seen to throw in the sponge and let the spending ministries run amok — still worse were it to make the Bank of England lead down our interest rates to teach it manners — then Tim Congdon's worst fears would be realised, and probably in even shorter order than he predicts. But suppose the Treasury were to fight every inch of the way before making the best of a bad job, and then to surprise us all with tax cuts even so, while con- tinuing to pay over the odds to attract the footloose foreign capital. Tim Congdon must be right that there would be precious few extra jobs to show for it — a strength- ening exchange rate would not leave much room for them. But those in work could find their earnings running well ahead of prices as they make up their minds how they will vote in the next election. Time enough to think about the 'debt-trap' in the next Parliament.
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