The Line of Tory Chancellors
By NICHOLAS
DAVENPORT IT is a little premature to say that the Conservatives are no longer in power, but one cannot resist looking back on the series of Tory Budgets—all thirteen of them—and passing judg- ment on an epoch of economic mismanagement which, we hope, is now closed. To attempt to manage an economy by a Finance Bill which has to be introduced once a year at a fixed time and to endure for twelve months—except occasionally for an autumn Budget when an exceptional crisis blows up—is a form of lunacy in itself. The Conservatives cannot, of course, be blamed for a financial system which they inherited, but they might have tried to improve it. Instead, they made it worse by reintroducing Bank rate as a supplementary eco- nomic weapon and making inordinate use of it in the intervals between their Budgets. How could they expect the economy to show steady growth when they made twenty-six changes in Bank rate in a little over twelve years—running the changes up from 3 per cent to 7 per cent? But this was not all. Their handling of the fiscal and monetary instruments was so clumsy and inept that they contrived to push the economy into what is popularly known as the `stop-go' cycle—two years down more or less and two years up more or less. It was Chancellor Amory who, having boasted of the abolition of the pre-war trade cycle, naïvely told the House of Commons that we were now always taking measures either to curb a boom or to halt a recession. Planned growth was not a Treasury policy until Mr. Maudling came in at the end of the line.
Butler, Macmillan, Thorneycroft, Amory, Sel- wyn Lloyd and Maudling—all made shocking mistakes except the last, who seems to have abandoned the Budget—rightly enough—as an instrument of control. Let us take a brief look at them. The first of the thirteen Budgets—in 1952—deflated by way of restrictions and dearer money and cut initial allowances in order to reduce investment! Investment in stocks fell much more than Butler had expected and the economy was over-deflated. The 1953 Budget
thereupon sharply reflated by reducing income tax and purchase tax, removing the excess profits levy, restoring the initial allowances and liberalis- ing building licences. The 1954 Budget was neutral, except for the innovation of investment allowances. With a reduction in Bank rate to 3 per cent in May, an investment boom, as anyone might have expected, got under way, but long before it was seen by the Chancellor. Although Bank rate had been raised to 4} per cent by February to cut the investment boom, the 1955 April Budget brought a lower income tax (6d. off) and higher personal allowances— and a Tory victory in the general election at the end of May. When the gold and dollar re- serves began to fall sharply in July, Butler realised the mistake he had made in April and introduced an autumn Budget in October, putting up purchase tax and raising the distributed profits tax. Before the end of the year Macmillan had replaced a discredited Chancellor at the Treasury and proceeded to kill the investment boom which Butler had created. Bank rate was raised to 51 per cent in February, 1956, and the investment allowances removed. In the April Budget the dis- tributed profits tax was raised to no less than 30 per cent. Macmillan firmly established the Tory `stop-go' technique. After Butler's `go' for investment (following on his preliminary `stop') the Macmillan `stop' brought on the first lengthy period of Tory stagnation. It was Macmillan who first decided to deflate the whole economy for the sake of an inflated part.
By this time the Tory Chancellors were be- coming a little sensitive about the mistakes of economic judgment which their offices had made. They commanded -the authors of the annual Economic Survey to make no prognostication of coming trends and they were careful to make no forecasts in their Budget speeches. They began to look round for a scapegoat if things went wrong and when Macmillan, after the Suez debacle, had left No. 11 for No. 10, the new occupant, Thorneycroft, found the scapegoat in the trade unions. Wages had been rising fast and although he had produced a liberal Budget in April, 1957, cutting purchase tax, giving higher earned income relief, he had decided by the autumn that he made a mistake—that the cause of the lack of foreign confidence in sterling was the inordinate rise in ‘rages. In fact, country that the £ sterling came first and full employment second. So he raised the Bank rate to 7 per cent and deflated the whole economy.
This was just at a time when the economy was beginning to show the first signs of a recession.
Unemployment had exceeded vacancies for the
first time for three years. It was a year, toc, when we had a surplus on our balance of pay-
ments. Macmillan saw that he had blundered and quicklyaccepted his resignation in January, 1958.
Amory at first continued the Thorrieyeroft `stop,' but in April, 1958, he changed profits tax to a single 10 per cent and so restored business confidence. He went on to reduce Bank rate– down to 4 per cent by November—and to re- move the hire-purchase restrictions and the credit squeeze. He started a consumer boom (with immense consumer credits) which he en- tirely failed to control. His 1959 Budget was positively expansive at the wrong time—income tax cut, purchase tax dawn, cheaper beer, post- war credits released and investment allowances restored. In the 1960 Budget with the boom in full swing he had to increase the profits tax to 121 per cent and before many weeks to bring in another 'stop' with credit restrictions and dearer money. Bank rate was up to 6 per cent in June. Lord Kilmuir wrote in his memoirs `Many of us had been disappointed by his [Amory's] performance after11959. . . . Whether it was merely that the sheer weight .of depart mental work overwhelmed him in his last months at the Treasury I do not know but it was evi dent that he had lost his grasp over economic matters.'
This"was evident, too, of his successor, the sado-masochistic Selwyn Lloyd. His first Budget in April, 1961, did nothing to restrain the con- sumer boom but imposed a tax of 2d. a gallon on fuel oil which put up our industrial costs) Then came the famous 'pay pause' in July with the use of the 10 per cent fiscal regulator and the most severe deflation of the economy we had ever seen under the Tory regime. National growth was stopped. It was this dismal scene tha Reggie Maudling inherited and thank heaver he has restored growth even if he has done it with the risk of some inflation, being unable to secure an incomes or wages policy.
What Tory economic mismanagement ha! established is, first, that the economy cannot IN kept in control by the use of Bank rate and credit squeezes, that economic forecasting at the Treasury is too unreliable for the safe use 0! the `stop-go' technique and that it is folly to de flate the whole economy for the sake of reducini pressure in one or two corners of it. The lessor to be learned—which the last of the line know, well—is that only planned growth and planner scientific investment, with managements and wad( unions taking part in the planning, will produce a healthy, balanced economy.
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