In the City

Mr Lawson lays it on the line

Jock Bruce-Gardyne

The other day, in the run-up to the Chancellor's autumn statement, 1 was asked to talk to a conference organised by a leading firm of stockbrokers in the City about the prospects for public expenditure. I was followed by a real pundit, who got down to the serious business of predicting the outlook for gilts. He was pretty bullish. The Government Broker, he pointed out, had been working overtime, and to good ef- fect. The money supply, after being somewhat roguish in the summer, was com- ing back on course. The building societies were so flush with cash that they were.prac- tically capable of funding the Govern- ment's borrowing requirement single- handed. Moreover, government spending seemed to be responding to the Chancellor's tight rein. Similarly in the United States the money figures were look- ing better. In short the outlook seemed set fair for interest rates and gilt-edged prices.

I don't know whether he has now revised his opinions, following the autumn state- ment. But I would not be altogether surpris- ed. For there do seem to be a few noisome odours coming from the wood-shed. Let us start, however, by giving credit where credit is due. There has been no repetition, this November, of last year's somewhat hazar- dous mathematics with those two residuals, the Contingency Reserve and 'shortfall'. Last year, it may be recalled, the confirma- tion of the figures for public spending writ- ten into the previous budget was achieved after slashing the Contingency Reserve from £2,500 to £1,500 million (a figure which was clipped further to £1,100 million before this financial year had started), and then boosting the amount by which depart- ments were expected to underspend their budgets to £1,200 million. This year, by contrast, the larger Contingency Reserve of £3,000 million has been left scrupulously in- tact, and no allowance has been made at all for 'shortfall', Nor is that all. In future, we are told, if the so-called 'dem-and-led' pro- grammes — things like welfare payments, which depend on the number of claimants, and the buying-in of cereals to keep the price up, which depends on the size of the harvest — cost more than expected, then the extra will be a first charge on The Con- tingency Reserve. Hitherto ministers could, and usually did, decide that such incidentals would justify a supplementary estimate, This is a real tightening of the purse-strings.

But it is needed. For just consider one significant figure: what has been happening to the government deficit this year. At the time of Sir Geoffrey Howe's last budget this was forecast to be 'around £8,000 million'. As always, that figure carried a health war- ning. Over the preceding 15 years, we were reminded, the deficit had regularly missed the target by a mile: if the average error were transposed into current values it would mean that the £8 billion forecast might turn out to be anything from £4 billion to £12 billion. But of course that average ,margin of error was drawn from a period of hyper-inflation, when strange things were particularly liable to happen to either side of the accounts. Now that infla- tion is down in modest single figures the margin of error should in logic be significantly smaller. Unfortunately, it does not look as if it is going to be.

For the Chancellor's latest guess is £10 billion — a crude overshoot of £2 billion. Yet in the meantime he has lopped £1 billion off the deficit by the July package of savings and extra asset sales, and collected £1 billion more than he expected from oil revenues. So the true overshoot (if his latest guess proves right, which it well may not) would be the full £4 billion. Of course if the oil price now came a cropper — as it might — and took North Sea oil revenues with it the overshoot could even be more than that.

What, then, has gone wrong? Part of the trouble is, quite simply, that since the Government turned out to have to borrow more in 1982/3 than it bargained for, and has so far done the same again this year, the cost of interest is now expected to be £1 billion more than predicted at the time of the budget. If spending now responds to treatment that overshoot should not be repeated. Social security spending is also running well ahead of target, and a further upward adjustment has been made for next year (a modest one, admittedly, in percen- tage terms). Then there is the massive cost of farm produce disposals — mostly wheat and barley — and, these do not look like go- ing away. If the case for digging heels in at next month's Common Market summit in Athens against the calls for extra cash for the farming fund needed reinforcing, the autumn statement provided ample rein- forcement.

Another time-bomb ticking away could prove to be the three per cent 'pay factor' for public services. The various spending departments have each and severally under- taken that if their pay bill overshoots they will find corresponding economies. That may turn out to be a tough pledge to en- force. All in all it looks as though there will be no shortage of calls upon that contingen- cy reserve.

Against this background the Chancellor could have taken the opportunity to indicate a predisposition to contemplate a somewhat

larger deficit next year than Sir Geoffrey's Medium Term Financial strategy had allow- ed for. He did not choose to do so: and in- deed it has been argued in some quarters that by only apparently allowing for £1,500 million from the sale of British Telecom he has purposely cooked the books against himself. There seems to be some muddled thinking here. In the first place, while the British Telecom sale may net £4,000 million overall it by no means follows that it would be either sensible or feasible to take in all, or even most, of that next year. In the se- cond place asset sales should really count as

a means of paying for the deficit rather than reducing it. And in the third place the £8 billion deficit set for 1984/5 is still a `conventional assumption': the actual figure will not be set until budget time.

Meantime the sensible verdict must surely be that the Chancellor deserves full marks for determination to avoid excessive bor- rowing, and in that context his warning of the possibility of increased taxation should, 1 suspect, be taken literally. But all this only underlines the continuing strength of pressures from the spending ministries to defend their corners. It is, for example, good news that the commitment to increase defence spending by 3 per cent a year over inflation-plus-Falklands has not been ex- tended beyond 1985. It is less good news to learn that it is going to grow by more than 8 per cent next year.

Add the latest information from the monetary front, and it does not really look as if the Government Broker will be able to take a sabbatical in 1984. So perhaps my gilt-edged pundit should turn for comfort to the latest addition to the ranks of financial

soothsaying: the London Business School's new Financial Outlook. It is rich in

thought-provoking material (and at £150 for a subscription it ought to be). It predicts that over the next three years gilts are going to rise by 25 per cent, and that by 1986-7 government gilt sales will be down by £3,250 million, offering a degree of preci- sion and a length of prescience at which Old Moore must be green with envy. If, however, my pundit turns to an accom- panying article by Mr Giles Keating he might then feel marginally less confident again.

Mr Keating begins by accusing the Government of boosting consumption at the expense of investment by over-funding.

The Government, he suggests, should stop shovelling out gilts, and at the same time promise lower short-term interest rates just so long as companies seize their chance to issue debentures. Now un- doubtedly the end result would be most attractive: bank lending would shrink, and so would the money figures, and interest rates would come down and stay down. The only snag is getting there. Companies would hardly rush in with debenture offers, and meanwhile the money supply would look uncontrolled. The foreign exchange markets would take fright, and short-term rates, instead of falling, would be propelled skywards. We have been there before.