ECONOMICS AND THE CITY
Second thoughts on the Budget
Nicholas Davenport
The first reaction on the Stock Exchange to a Budget speech Which might have been made by a Conservative Chancellor — if there were one capable of the thought and language — was to mark equity prices up and gilt-edged stocks down. The second reaction Was to mark everything down — very flat — especially equity Shares. The realisation that the budget could make our cost-inflation worse, the balance of Paytrients worse and the borrowing requirement the worst ever seen in Peace time, brought jitters back to the gilt-edged market and drove buyers away from equities, excepting, of course, gold shares. The FT 'thirtY' index of industrial equities droPped from 195 to 186 (low this Year 181), putting them on a Nice-earnings ratio of around 3.4. I still salute the Chancellor as the ,eannY old skipper of a waterlogged, not sinking, ship, throwing a nfe-line to the wretched businessmen washed overboard into the 'ea of bankruptcy and telling the Working seamen to man the pumps ta",nd Pump out the water of inflaen. He was tough enough to tell them: "If wages rise beyond the limits set by the TUC, the Government will be compelled to take Offsetting steps to curtail demand. And the effects on the financial position of the company sector are dound to lead to unemployment, as Mr Jack Jones pointed out in a Powerful speech the other day." No ,onservative Chancellor could nave used stronger words. What he ,,neant was that if militant unions Priced themselves out of jobs by Unreasonable wage claims the Go,verntnent would not save them by Printing more money to inflats cr,nnsumer demand. Nor, added Mrs flirtey Williams, would they save employers who broke the social teontract by giving in to the So both ministers in my view 'bui °Wed themselves to be responsi'e statesmen determined to Prevent the breakdown of our ‘.4traXed economy and preserve a if not prosperous, private ,,,What made the City go nervous 'es to find the 'Tribune' Leftists and the Marxist socialisers attackthe reasonable life-saving measWes of the Chancellor and Mr karold Lever's scheme for FFI sLans to companies in trouble WPIY because they wanted to see livate enterprise collapse and Mr nn's National Enterprise Board
take over bankrupt companies in the name of the communist state. They do not seem to realise that Saint Wedgwood Benn has not enough skilled administrative monks in his state monastery to run the companies taken over either efficiently or economically.
Apparently our Marxists are still determined to seize "the commanding heights of the economy," I used to tell Dalton in the 1945 government that it was quite unnecessary to take over these 'commanding heights', meaning the banks and the life and pension institutions, provided that he got these institutions to agree to a certain direction of investment into Government bonds and agencies, which they would have been willing to do. Is this not what Mr Harold Lever is proposing to do in the £1,000 million relief for industry to be organised through FFI? According to Mr George Loveday, the chairman of the Stock Exchange, the FFI issues will be treated as gilt-edged stocks and their subscribers, I presume, will be mainly the life and pension funds. Saint Wedgwood would still be able later on to plan investment with big industry through his National Enterprise Board, always assuming that he has agreed to the mixed economy and has given up his dream of the Marxist state. Who knows — funnier things have happened — but Mr Henley, Mr Lever, St Benn and Mrs Williams may eventually allow some confidence to return to the equity share market when the City realises that they really do want to see a prosperous private sector. I think stockbrokers are correct when they now advise their clients to start. buying the industrial shares of companies which will be greatly helped by the relief of taxation in their 'stock' profits and by the relaxation of the price controls. The upsetting part of the budget was its finance which involved the staggering increase in the borrowing requirement to £6,331 million — against the March budget estimate of only £2,733 million. Mr Healey confessed that it was "a disturbingly large figure which one would never accept under normal circumstances." But circumstances are not normal. The whole oil-consuming world is in deficit because of the outrageous quadrupling of the price of Arab oil and if one country tried to eliminate its own deficit by import controls, export
subsidies and higher taxation it would put other countries more in deficit, add massively to unemployment and bring on a world recession more devastating than that of the 'thirties. However, the worsening of our trade figures for October — a fall in exports of £90 million and in imports of only £23 million — should remind Mr Healey that he cannot afford to let the non-oil deficit get any worse. The total deficit for 1974 may not be far short of £4,000 million.
The huge public sector deficit is, as Mr Healey said, the inevitable counterpart of the huge balance of payments deficit — given, he added, that the private sector as a whole cannot be in substantial deficit without grave consequences. What matters, he went on, is that a public sector deficit should not be allowed to become so large that its very existence causes a pressure on resources, a further deterioration in the balance of payments and a disproportionate increase in the money supply. Mr Healey saw no reason why the colossal borrowing requirement should involve any of these consequences. I fervently hope he is right. But if you will look at the red book called Supplementary Financial Statement and Budget Report 1974/75 you will see that 'current
expenditure on goods and services' of the local authorities has gone up from £6,422 million to £7,160 million since the March Budget estimate!
The local authorities now account for 30 per cent of the total public expenditure; their current spending alone accounts for 20 per cent of the national total. In each of the three years since 1971-72 their current expenditure has been going up by 7 per cent to 8 per cent in real terms! It has got to be stopped. Mr Crosland's joke about another 100 per cent increase in local rates should not have shocked but should have jolted our legislators out of their stupor.
When the gilt-edged market has realised that skipper Healey knows all the unpleasant facts about our financial position and is doing his best to avoid making them worse, when it has also realised that the Lever scheme for advancing medium term loans to industry through the FFI machinery does not involve institutional selling of government stocks but a mere switching from 'the street', it should recover its poise. A dated stock like Treasury 73/i per cent 2012-15 which fell 21/2 points to 4634 to yield currently nearly 171/2 per cent is some evidence that the market has temporarily lost its nerve.
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