ECONOMICS AND THE CITY
The Bank's election manifesto
Nicholas Davenport
Now that the three party manifestos are out and about it would be a good thing if voters were to read the Bank of England manifesto and get at the truth. (I refer to the Bank's September Bulletin.) While the political propaganda sheets agree that Britain faces a very serious crisis — the most dangerous since the war, says Labour very Properly — the man in the street is Still pretty vague about its economic significance and cure. While the price inflation rages he has been told not to expect any rise in . his real standard of living but to rely on a sufficient wage boost to stop it falling. Is this not giving him a false Picture and raising a false hope? The Bank's Bulletin, if you read between the lines, suggests that it Is. It emphasises the fact that we are not paying our way in the world, that we are living on borrowed money and that if our credit-worthiness were to collapse, and our borrowings abroad dried Up, we should be in the soup. We are running this year a deficit on our balance of payments of over £4,000 million due mainly, but not entirely, to the quadrupling of the price of our oil imports.
So far, as the Bank of England remarks, this has been very easily financed. Taking the second quarter deficit of £1,050 million the foreign currency borrowings of the Public sector alone took care of £500 million while inflows of foreign capital accounted for 'E660 million. This should remind us of the fact that our official reserves at the end of August — £2,363 million or $5,435 million — are really a faked-up figure. About 80 per cent of them — $4,373 million — repre; sents the foreign currency borrowings of the public sector which in due course — ten years or so — will have to be repaid. We have only got £306 million or $704 million — of gold.
That may explain why Mr Healey Proudly announced that we had secured a loan of $2,500 million in the Euro-dollar market and $1,200 million from the Shah of Iran. Neither of these loans has yet been drawn upon but when they are the interest we must pay on them and on the public sector's $4,373 million Will amount to around $800 million a year. We are mortgaging our future, so that when the North Sea fields produce their oil the first Profits will be mopped up in interest charges. None of this sorry story will be found in the party political broad-sheets, but it is set out for all to read in the Bank of England Bulletin.
What makes it easy for the Bank to finance our appalling trading deficit is the prudent behaviour of our Arab creditors. In the first six months of 1974 the Arab exporters received over £3,500 million as oil revenues paid in sterling of which they retained some £860 million in sterling balances. If they were to remove these vast sums from sterling the floating £ would sink to levels which would send our import bills sky high. I am not suggesting that they will. Sheikh Ahmed Yamani, the Saudi Arabian oil minister, has been showing great discretion; he has opted out of the further rise in oil prices which the other oil states are making before the end of the year; he has repeatedly called for an international conference on energy, as I have often urged, saying that the interdependence of the world's economies is so advanced that no one group of countries can solve its problems in isolation from the rest. But let us make no mistake. Sheikh Yamani will be watching the British election with great interest. If he sees a new government in power which will nationalise the top companies, introduce taxes on wealth of a confiscatory nature and allow wages to go through the roof, he will undoubtedly consider removing his sterling balances. The next warning the Bank manifesto gives is not about the country but about companies going bust. The generation of internal [company] funds," it says in its usual jargon, "may now be insufficient‘to sustain investment [which, it admits, has already been checked] and may in some cases fail to provide a satisfactory basis for companies to seek further funds from the banks." Hence the trouble at Ferranti. The profitability of industry has been declining for some years, the Bank remarks, and the liquidity strain has been aggravated by inflation, which puts up the cost of financing stocks and re-equipment, and by price controls which have squeezed profit margins. With very dear money and with the slump in equity shares making it virtually impossible to raise money on the capital market, companies have had to look more and more to the banks for help and I understand that the clearing banks have now told the Bank of England that in another six months they will be unable to meet company demands. This is a very serious liquidity crisis for the private sector. The daftest thing Mr Haley ever did was to make eworse by forcing companies to increase the amount paid in advance corporation tax — besides raising corporation tax to 52 per cent — and so adding to their financial squeeze. But you will not get any idea of this money crisis by reading the Labour manifesto. You will probably get the idea that industry has lost confidence in itself — or has been so badly managed — that it is not investing in the plant and equipment needed for its 'regeneration.' The truth is that Labour's fiscal policies have made it impossible for any company to do so which is not miraculously blessed with cash. The Bank ends its Bulletin with a cautionary note about exports. The prime minister has boasted of the fact that the trade deficit in August fell to the lowest figure for ten months. Exports were up £52 million to £1,379 million and imports
were down £107 million to £1,698 • million. This, he said, was the beginning of the drive to eliminate the non-oil deficit which Mr Healey claimed could be achieved by the end of next year. But the volume figures for overseas trade in the three months to July revealed that both exports and imports were falling as compared with the three months to April. This does not support Mr Healey's optimism. The Bank comments that to maintain the country's international credibility we must have a major improvement in the trade deficit, especially in exports, but adds that "the less buoyant conditions of world demand will make this more difficult to achieve." The Economist is not alone in believing that a world trade recession is on the way in spite of the agreement on the part of the finance ministers at Paris recently to concert action to avoid one.
No one wants to write Britain. down but the rise in basic wage rates in August set a record — 4.1 per cent — and throws a doubt upon the future competitiveness of British goods. If only the election campaign could reveal the truth about the money crisis!
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