A Chancellor's lot

REGINALD MAUDLING, MP

Steering the Economy Samuel Brittan (Seeker and Warburg 100s) Mr Brittan's book is an extension of his earlier The Treasury Under the Tories. His earlier work has been revised and enlarged. Mr Brittan carries his account of recent economic history up to the 1967 devalua- tion.

The book falls into three parts, which are distinct but interrelated. The first is a very full account of the workings of the Treasury machine in its various aspects, from the broad organisation of economic policy to the detailed control of expenditure. The second deals with the history of economic management in the postwar years, from the Chancellorship of Dr Dalton to that of Mr Callaghan. Finally, in the third part, Mr Brittan turns to current problems of economic policy, in the light of his previous analyses, and reaches his own conclusions.

This is such a comprehensive book that it is difficult to review without writing in effect another book. But it is immensely readable, and will be extremely valuable to all who wish to form a clear picture of Britain's economic problems. Mr Brittan writes with great clarity and with complete political impartiality, though he is openly partisan of certain economic measures, in particular, as his friends have long known, the introduction of the flexible exchange rate system in one form or another. Clearly it is impossible to guarantee that his various accounts are accurate in every particular, but so far as he is dealing with matters of which I have personal experience, I find his account very fair and, though I differ with him on some points, they are mainly differences of alternative approach or inter- pretation.

Naturally, I turned early to his account of the so-called 'unfinished experiment' of 1962/64. He is right in saying that this was a deliberate attempt to break out of the stop-go cycle by keeping the economy mov- ing forward, and borrowing to cover the inevitable balance of payments deficit ex- pected at the beginning of a period of ex- pansion, when the demand for greater im- ports precedes the return on higher exports. As he rightly implies, no one will ever know whether this plan would have suc- ceeded. The difficulty was that the deficit proved much larger and more persistent than Treasury estimates had suggested. In- cidentally, at the time of the 1964 Budget no oflicial estimate was suggesting as much as £400 million as the year's deficit.

Where I disagree with Mr Brittan is on action that could or should have been taken to deal with this unexpected situation. Cer- tainly I put in hand work on import quotas or tariff surcharges to be used if the balance of payments deficit proved so stubborn that this became necessary, and to this extent, I gather, I have Mr Brittan's approval. Where I do not agree with him is in his argument that provision should also have been made for devaluation. I did not believe and I do not think there was any substantial evidence at the time to show that Britain's prices were out of line, and that there was, therefore, a fundamental disequilibrium. Short of disequilibrium, the effects of de- valuation can only be adverse and, indeed, I think it is one of Mr Brittan's misjudg- ments that he tends to look always on the pluses that can arise on changes of parties, while paying far less attention to the minuses.

Mr Brittan is particularly interesting on the machinery of government, and his judg- ment in the epilogue-111e British Treasur was ahead of most other Finance MinistrieN over most of the period covered in tin, book'—is a fair one. Civil servants and their departments, of course, suffer from in- herent weaknesses in addition to those im- posed on them by their ministerial masters. but anyone who has spent some time at international economic conferences cannot fail to recognise the outstanding quality ot British civil servants, and the very high regard in which they are held by their counterparts in other countries.

On the machinery of government, Mr Brittan is right in arguing that economic management must be the affair of one de-

partment and one minister, whether be be called Chancellor, as I would prefer, or Economic Minister. You just cannot divide the various functions of economic manage- ments, internal and external, and allocate them to differing departments without pro- ducing chaos, as recent experience has sadly shown. Where there is scope for devolu- tion is in the details, for example, of con- trol of expenditure or taxation. But the first of these has been dealt with by the device of having a Chief Secretary to the freasury of Cabinet rank, which prevents spending Ministers from appealing direct to the Chancellor—as they could always do ‘hen turned down by the Financial Secre- tary, who was not of Cabinet rank. I think there is a case to be made, as Mr Britian suggests, for a similar arrangement where the details of taxation are concerned. But

■ ri his general treatment of federal ministers, %%bile he is certainly right in saying 'the fewer ministers there are, the better', he underestimates some of the practical dif- ficulties.

The main snags in our Cabinet system tend to arise from the structure of parlia- mentary government, and the nature of ministerial responsibility. It is very difficult for a minister to take responsibility in parliament for his department's actions and policies, unless he is directly in the Cabinet himself, and is personally responsible for carrying his Cabinet colleagues. Some ex- periments in federal ministries after 1945 showed very clearly how real this difficulty was in peacetime. I have not yet myself seen a way to resolve it, nor have I yet seen a satisfactory solution to the basic prob- lem of how to give Cabinet Ministers enough time free from their urgent day to day departmental chores to enable them to sit back and reflect on the broad develop- ments of policy.

When it comes to Mr Brittan's assess- ment of economic policy in part three of his book, there is much with which I would agree: the need, for example, to preserve the link between problems of finance and problems of real resources, while under- standing the separate natures of both; the need to maintain an appropriate level of domestic demand while recognising that ex- cessive accuracy should not be expected, and that rapid reaction to changing and often unforeseeable circumstances is essen- tial. But where I part company with Mr Brittan to a considerable extent is in his advocacy of a floating exchange rate. Cer- tainly he puts the case for a floating rate clearly and persuasively, as he has often done to me when we have discussed this subject in the past. But I am not completely convinced in practical terms, and indeed, with experience, I have come more and more to doubt the validity of the argument.

Mr Brittan does not advocate, as some do, a completely free market rate. He believes lo official management: thus, he can ward off the dangers of complete chaos which total freedom might imply, but at the cost of simultaneously rejecting the thorough- going theoretical argument of those who believe in total freedom. But I cannot help feeling that he underestimates the difficulties Of a floating rate, and also of the effects Of parity changes on the domestic economy. I do not think that there can be any doubt, in the light of experience, that a general system of floating rates would of itself create considerable difficulties for trade, and a substantial disincentive to many exporters. It would be all too likely, moreover, to lead to competitive devalua- tions with all the economic setbacks that this implies. For countries, moreover, like Britain, where the capital account becomes steadily of greater importance, it seems likely that the effect of the movements of a floating rate could severely damage the course of current trade.

As for the domestic effects, it must be remembered that devaluation is undeniably a voluntary act of self-impoverishment. It will not produce its effects unless it reduces the level of consumption, which it does largely by increasing the cost of living. But this in itself is liable to trigger off wage movements, which can nullify the benefits of devaluation, while creating social prob- lems, such as the hardships imposed on those who have not the bargaining strength to put their incomes up. There still seems to be a lingering feeling that devaluation is a painless alternative to deflation of demand (can one detect a hint of this in M Pompidou's defence of his latest devalua- tion, and his reference to the severe alter- native?). I hope Mr Brittan will not take it amiss if I say that I do not think he is entirely free himself from this misunder- standing!

On the other hand, one must accept his argument that parities have in recent years become over rigid with damaging conse- quences. Certainly this rigidity is far be- yond anything intended at the Bretton Woods Conference, but I suspect myself that the solution of the problem will lie more in a change of attitude on the part of governments, and a willingness to make parity changes on the basis of economic, rather than political factors, than it will in a general introduction of floating rates.

This is just the sort of book which sets off these trains of thought and argument. That is another of its many and distin- guished qualities.