THE ECONOMY
The apostasies of Professor 'a little of what you fancy' Budd
JOCK BRUCE-GARDYNE
The London Business School has many virtues. It has furnished us with Mr Nigel Lawson's urbane and skilful Chief Econo- mic Adviser, Sir Terence Burns. It is presided over by the eloquent Professor Alan Budd. But it is not exactly renowned for being staffed with what Monty used to call 'chaps to go shooting tigers with'. Back in the early 1980s, I seem to recall, Professor Budd caused much consternation in official circles, and hilarity amongst the scoffing classes, by going into the confes- sional to reveal that reliance on monetary discipline to squeeze inflation out of the system hadn't altogether lived up to his expectations. So we should not be too surprised to see that he and his fellow- scholars have done it once again. In its latest exercise in crystal ball- gazing, which thumped upon our desks last weekend, the LBS concludes that if the growth in earnings carries on at the current going rate of 71/2 per cent per annum, or anything like it, then by next year inflation will be starting to accelerate once more. Denis Healey must be tickled pink (or perhaps purple might be more appropriate, since he's several shades deeper than pink untickled). When he used to predict from the Treasury that 10 per cent on wages would mean 5 per cent on prices — or was it the other way round? It matters not none of us derided more loudly such simple-minded mathematics than the Lon- don Business School. But times change. Admittedly the LBS does add the rider that of course the Government could theoretically blot out the effect on prices of sharply rising unit costs by tightening monetary policy. Since it cannot remotely see that happening, it relies instead on the assumption that earnings growth will at long last begin to respond to low inflation, and predicts that we will progress on smoothly down to 2 per cent on prices in 1989. On the strength of all of which the professor has now signed on with the housemaid's baby' school of reflation. He reckons a quarter of a million jobs could be bought for £1 billion more of deficit spend- ing. The wheel has come just about full circle.
And what of the state of monetary policy, to which the LBS used to attach some modest importance? Well, it is not quite as insouciant as the Treasury. The Treasury's line (and how they must curse the miscreant who talked them into retain- ing a target for 'broad money' in this year's Budget!) is that the 39 per cent rate of growth in sterling M3 in the latest quarter is nothing more than 'velocity': spinning round like a top, it is, that silly old speedometer. Mr Toad would be proud of them. The LBS betrays a lingering angst. One day, it reckons, we shall need to watch it. But not now. For as inflation falls so `broad money' must accelerate: it's what's known as 'stock adjustment'. There will come a time when 'stock adjustment' is complete. Then, by golly, we had better take the £M3 dial seriously once more, or we shall catch it. How shall we know when `stock adjustment' is behind us? Ah that the LBS wisely cannot tell.
The City of London is not quite so easily comforted. The May money supply figures gave the gilt-edged market a nasty attack of the collywobbles, and talk of further falls in interest rates was swiftly silenced. So, just for once, it's Thank God for the CBI. The CBI is not usually Teacher's Pet with HMG — and for good and sufficient reason, as it seems to some of us. But its latest quarterly check-up on the mem- bership has offered more or less everything the Chancellor could ask for.
Not all sweetness and light. Not by a long chalk. 'Rather flat and patchy' is how the CBI's Mr Wigglesworth summed up members' sentiments. But better times are just around the corner, with output now expected to pick up again following the recent pause for breath. Which happens to be almost word for word the Chancellor's message to the Welsh Tories last weekend. Better still, the CBI's members apparently see less prospect of being able to pass on their rising labour costs to customers via higher prices than at any time for twenty years. So maybe wage rates are not quite the determinant of future prices which the LBS has discovered them to be.
That's for the next four months, at any rate: the range of the CBI's crystal ball doesn't stretch further than that. Besides, the outlook for prices once we get on into 1987 depends on a number of matters as yet unresolved. This year's public expendi- ture negotiations, for example. Here things seem to be moving auspi- ciously for the Alan Budd 'a little of what you fancy does you good' strategy. The House of Lords has once more run amok with Norman Fowler's departmental budget (if we carry on like this we'll turn the Prime Minister into an abolitionist), and compensation claims for Chernobyl- infected lambs from Cumbria and Wales should make a hefty dent in what is left of this year's fund for contingencies. As for next year's piggy-bank, it seems to be shrinking fast already. Nothing to worry about, we are assured, since the £6.3 billion figure originally pencilled in was based on the assumption that the local authorities would operate a wage-freeze, and even the Treasury never believed that: it is only 'realistic' to make provision for the salary increments required to keep the classrooms ticking over. Fair enough, ex- cept that the annual ritual of matching spending budgets to the global total the Chancellor first thought of does seem to have begun a bit early this year. Conven- tion normally decrees that the Chief Secretary should hang on to his piggy-bank like grim death until the moment in Octo- ber when it is plain that the sums can only be squared by dipping into it. At the present rate there isn't going to be much left of the £6.3 billion to dip into when October comes round.
Fortunately there's still Sir Denis Rooke. Unless the House of Lords fouls up the timetable the British Gas flotation should yet provide the Chancellor with at least the lion's share of his expectations of what they call 'negative expenditure' from the privatisation programme before the year is out. Add in the continuing buoyan- cy of non-oil tax revenues and Mr Lawson should still, with luck, be able to produce a figure in November for total public spend- ing in 1987-88 which the markets will not find too scary.
Subject, that is, to one not unimportant proviso. The markets should be able to cope with the likelihood of a somewhat larger budget deficit (after stripping out the fancy figuring) next year providing it feels it can trust the Government to pay for it through proper funding, and the rates of interest which may be required to achieve that. This, unfortunately, is where the British Gas flotation has a flip side. When the far smaller British Telecom was floated off two years ago there was more than a suspicion that interest rates were hurried down to get it triumphantly away. Could the same thing happen once again this autumn? To which the official response is `The very idea!' I'm keeping my fingers crossed.
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