In the City
Recovery and gloom
Nicholas Davenport
My favourite economic reading is the Bank of England quarterly Bulletin. It is written in Food plain English and avoids the economic Jargon of the Oxbridge institutes. The June edition is an excellent one but what does the financial press pick out for quotation but the least supportable of its opinions! A strong Warning is given, they say, that positive steps of a budgetary nature may be needed to keep demand and the public sector deficit Within the bounds that the economy can accommodate'. It is clear, remarks the Financiel Times, that the Bank is hinting at the possible need to increase taxes, particularly indirect ones. Now if there is any economic policy standing out in letters of fire it is that the taxation in this country falling upon both managers and workers is so grievously burdensome—so inimical to hard work and Productivity incentives—that it must on no account be increased at this early stage of our recovery from slump and inflation. Fortunately, the Governor of the Bank, who apparently does not read his Bulletin before it goes to the printers, said in a recent Speech to the annual conference of the Chartered Institute of Public Finance and Accountancy that a reduction in the budget deficit would have to be achieved through cuts in spending rather than increases in taxation. To quote Mr Gordon Richardson, PC—who has wisely escaped ennoblement so far—in full : 'If there appears a fair Chance that the expansion of the economy is going to require budgetary adjustments I suggest that in view of the time-lags the bias Should be in favour of adjustments to spending made in advance to avoid the risk of later having to put up taxes further'. This, I am sure, is what the Chancellor intends. In spite of the opposition of his madcap Marxist left wing he has never denied that he intends to bring government expenditure down in 1977-78. Most financial Commentators tend to sniff at Mr Healey's good intentions but it is obvious to me that be knows perfectly well that the £12,000 Million borrowing requirement has got to be brought down, that he cannot do it before 1977-78 and that although he may slice off uP to £2000 million it will never stay down unless he can bring down the rate of interest and with it the interest charge. I seem to be the only financial commentator who keeps nagging at the outrageous cost of money, Which is both inflationary and inimical to business enterprise and investment. A Country which allows a businessman to draw I 31 per cent for ever for doing nothing but. sitting idly on a packet of War Loan while he would have to pay 15 per cent to run 4 business is void of common sense.
A passage in the Bank Bulletin which ex cited Samuel Brittan, the most erudite and least bitchy of all our commentators, was one which suggested that the Bank was coming round to money supply thoughts. It ran : 'There may be a case for expressing the rate of expansion to be aimed at in terms not of the expansion of real output but of the growth in money national income'. This is exactly what Samuel Brittan had been advocating. He had, like me, disliked the monetarist Keith Joseph school of thought. Politically it is quite impossible to secure parliamentary control of the stock of money but Parliament might set limits to the money national income or cash ceilings for the whole economy. If this were done it might be possible to get the union bosses to see that if one powerful union secured a wage increase in excess of the money national income target it would result in lower wages in other sectors or more unemployment. Can the trade union leaders be educated enough to see this point—a vital one if something like free collective bargaining is to return by the end of 1977?
This question of whether it is possible to educate the trade union establishment to accept the simple economics of a free and mixed economy is the great political issue of our. time. A notable advance has already been made. The fact that Jack Jones, the leader of our largest union, realised that printing money like confetti was a mug's game was responsible for a wage restraint
policy which is now to last for two whole years—to the amazement of the capitalist world. Jack Jones has his blind spots, for
example, his doctrinaire egalitarianism, which if carried into law would drive our
best managerial talent out of the country.
(It is already on the move out.) But he may yet be persuaded to pipe down on this tune and even to accept the idea of cash ceilings for the money national income as Samuel Brittan proposes. He can have no better mentors than the Prime Minister and the Chancellor who carried through this latest wage restraint deal with great tact and skill. The Tories with their money supply kinks could never have done it. The fact that the present Labour government has a consensus with the trade union establishment which is based on common sense and sound economics and not on revolutionary nonsense is the most reassuring news for the City which has come out of Whitehall for a long time.
Yet the extraordinary thing is that the City has turned sour. The bull market was halted, first by the spate of new issues, then by the rocketing of Bank rate to I l per cent over the sterling crisis. Now that the plethora of new issues is being overcome (the duckling Equity Bank has even raised £40 million) and the sterling exchange steadied by the huge stand-by credit (which should allow Bank rate to be reduced) one would have thought that the bulls would return to the equity share markets. The greatly improved outlook for company profits should have been the spur. One reputable firm of brokers estimates that company net profits (before tax) will rise this year by 30 per cent on the old accounting basis of 'historic cost' and by much more next year. According to new official figures the economy is recovering almost rapidly : their estimate of the rise in the gross national product since last autumn is an annual rate of near 4 per cent. But this does not seem to have whetted the appetite of the bulls. Business has fallen off sharply. Bargains this week were at the lowest since August last. The turnover is low enough to threaten the smaller firms of stockbrokers with bankruptcy. The explanation of this lacklustre is, I think, twofold.
In the first place, there is still a limitation placed on dividend increases. It should be explained to the trade union leaders that if they want the City to buy industrial equity shares so that, the companies can make 'rights' issues of risk capital for investment purposes and avoid the crippling high rates of interest which make investment unprofitable, and, further, if they want their own union pensions funds to grow to meet their members' superannuation, then the limitation on dividend increases should be lifted.
In the second place, I note a growing feeling of despondency among the old risktaking investors in theCity. Even if company dividends are on the move up, the trends towards the socialist state goes on. The Government intends to complete the nationalisation of the shipbuilding, shiprepairing and aircraft industries; it proceeds to take over the most successful port (Felixstowe) which private enterprise has ever built up; it .hands over to state dockers the handling of container-refrigeration plants which are outside the ports; in other words, it is out to kill the rewards of enterpreneurial skill which once made Britain great. This mood of despondency is excellently described in Patrick Hutber's book on The Decline and Fall of the Middle Class.
When the Stock Market revives it will be because the middle class is fighting back.
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