Some 'starters' please, Mr Jenkins

CHARLES VILLIERS

Charles Villiers is managing director of the Industrial Reorganisation Corporation.

A look at the Budget must obviously start from the economic problems it was designed to solve. Overwhelmingly the most important of these problems, as Mr Jenkins made abun- dantly clear, is the weak competitive position of many of Britain's most important industries. Over the last twenty years the rate of growth of output per unit of input has been lower in the UK than in any of the EEC countries, Japan or the United States. In Germany and Italy this rate of growth has been something like three times as fast as in Britain. This repre- sents a fearful erosion of competitiveness in British industry and it lies at the root of our economic difficulties, in particular the balance of payments problem. It stops our progress

to the open sea where we can choose - our own course.

This gradual loss of competitiveness is par- ticularly acute in manufacturing industry. Over the last twelve years total imports and total exports have both approximately doubled, but this conceals radically different movements. Exports of manufactured goods have increased broadly in line with the doubling of total trade, but imports of similar goods have more than quadrupled. Either exports have failed to rise at a proper rate or imports have risen at an excessive rate, or a mixture of both. The evi- dence suggests that it is more a lack of exports than a superfluity of imports that has been responsible for our bad trading. It is true that penetration of the inc market by imports of manufactured goods has rapidly increased, but this experience is paralleled J?y that of other developed economies. What is much more worrying is our failure to export a rising per- centage of our domestic product, as our main trade competitors are doing.

The Budget should, then, be looked at pri- marily in terms of its effect on the competitive position of manufacturing industry and its contribution to the balance of payments. In this light, Mr Jenkins appears as a man who has succeeded in bringing the horse to water, but has not got it to drink. By devaluation, in November 1967, and by restraining consumer demand, the Government has gone a long way towards removing the obstacle to export-led. expansion. Devaluation made our expo-rts" cheaper relative to those of our competitors, and holding back private consumption and government expenditure, as Mr Jenkins suc- cessfully did in his first Budget, has made resources available for a greater export effort.

But resources do not move by themselves from domestic consumption to exports. The horse will not drink if it is not thirsty. There needs to be some positive stimulus if the re- quired shift is to take place. Mr Jenkins has decided in his Budget to continue the policy of restraining consumption by removing pur- chasing power from the economy through additional taxation. But what is missing is a stimulus designed to ensure that industry actually shifts resources into export and im- port substitution and brings about an im- provement in the form of dramatic productivity increases.

We all know that, whether wIs like it or not, we are living in an a4e of rapid transition. If industry is to come to terms with this fact fundamental changes are needed in the atti- tudes of many management teams, to say nothing of organised or unorganised labour. There are three ways in which traditional atti- tudes are giving way to new—in the concept of the market for products and systems, in the level of investment and in personal mobility. Many industrialists have been used to considering the UK, plus Commonwealth countries, as their effective market. In future the world has to be the market, and particular effort must be concentrated on the vast and rapidly growing economies of Europe, North America and Japan. British management has also been accustomed to accepting low rates of net 'investment and of staff and labour mobility. But if our competitive position is to be restored, new investmentanal the re- deployment of people on a great scale .is necessary. So we need a series of incentives designed to promote risk taking, mobility, am- bition and leadership in our industrial life.

I see little evidence of such thinking in

Mr Ienkines Budget. Indeed in- one -ease—the increase in corporation tax—the Chancellor seems to be acting directly contrary to the need to raise the level of investment. It is true that the new rate of corporation tax is no higher than that in many other countries, but it will inevitably reduce the funds.available. to companies for investment. The concession to 'close' companies is welcome but I would have also liked to see a sharp stimulus to further investment in the shape. of deprec,iation at rates chosen by industrialists rather than by, the Inland Revenue.

At the same time, I think that there is a good case for a stimulus to individual as well. as to corporate earnings. I am thinking here of some relief of taxation falling on incomes in the £5,000 to £10,000 bracket, that is to say the sort of salary earned by the middle and upper echelons of management on- which the. dynamism (or lethargy) of our companies largely depends. I do not, of course, suggest. that this is some kind of panacea for our economic problems, or that on the abolition of surtax British managers would instantly become twice as productive. But no society thrives where the rewards for success are small and the penalties for failure large. We need to move rapidly towards a situation which is now commonplace in the us, where execu- tives with enterprise and good ideas can back their hunches by showing independence of their masters, to the extent of forming their own company if necessary. They cannot do this as long as the level of taxation and the difficulty of saving reduces even the most lively minds to almost complete dependence on their employers.

But all this is not enough. A third stimulus is needed to ensure that higher investment and greater corporate dynamism are directed to- wards export and import substitution. This means a further move away from direct and towards indirect taxation. The adoption of a

value-added tax would- be a 'useful weapon in this respect and I am sorry that Mr Jenkins did not suggest that this was one of the Government's objectives in the near future. A relatively high VAT, which would be rebated on exports, would provide a stimulus in an area where, to judge by the sluggishness of recent trade frgures, further push is sorely needed.

These three direct incentives would go a long Way towards sharpening the "forces which determine our economic efforts. But budgetary policy is only one aspect of economic strategy. Other, non-fiscal, measures are necessary to back up what has been done in the Budget, and we must hope that Mr Jenkins ensures that monetary and incomes policies do not wipe out all the gains in shifting resources which the Budget has made possible. We must con- tinue to bring about changes in the obsolete structure of some of our manufacturing in- dustries, and we must- urgently tackle the most serious problem of all—the state of our industrial relations. In this respect Mr Jenkins showed in his Budget speech a full apprecia- tion of the urgency of the problem.

Over the last decade and more every year saw a slight loss in the relative competitive power of British industry. The effect in any one year goes largely unnoticed, but the cumu- lative effect of this slow process over a long period is more considerable than most of us have yet realised. In 1956 for each £100 of manufactured exports we imported only £35 of manufactured imports sand -this gave us a sufficient margin for other import require- ments; by 1968 for each £100 of manufactured exports we imported f72 of manufactured im- ports. This margin is, not sufficient nor has the adverse trend yet halted.

In homely terms we used to call pills `starters' and 'stoppers.' Mr Jenkins has dished out two heavy doses of 'stoppers.' If he goes on our economy will become completely con- stipated—we need some `starters'!