THE ECONOMY & THE CITY
Mr. Callaghan's Winter Coat
By NICHOLAS DAVENPORT
Wp must not be lured,' said Mr. Callaghan at the bankers' feast last week, `by any signs of a false spring into discarding our winter coats too soon.' I am not sure that it was a very good simile. If the winter coat stands for chilli- ness or confinement, no one has been conscious of wearing one outside Throgmorton Street. As the Chancellor said, the level of employment re- mains high, industrial investment remains high and exports are still rising. Taken together, de- mand and activity are still expanding, but more slowly. And he added: 'I expect to see them con- tinue to expand, but at a fairly slow pace. over the next six months.' Indeed, if they did not pick up by next April we might expect the Chancellor at budget time to take off his jacket—and invite us all to take off our shirts.
Some people seem to be disappointed that the Callaghan squeeze has not caused a slump. Cer- tainly there is no evidence of recession in the figures of unemployment,' but this may simply be due to labour hoarding—our perennial vice. The index of industrial production, on the other hand, undoubtedly --points to near-stagnation. (The seasonally adjusted figure for manufacturing in- dustries has hardly moved for eight months, while that for all industries has dropped a point.) The key motor industry is producing 10 per cent less than a year ago and some of the manufacturers of durable goods (vacuum cleaners, refrigerators, washing machines, etc.) have been forced to work short time. So has a subsidiary plant of United Steel. Significantly, bank advances have recently fallen off by over £100 million. Mr. Callaghan was therefore justified in telling the bankers that 'the signs are unmistakable that the Government's measures are reducing the excess pressure of demand. Consumer demand, private house-building and stock-building have all been affected.'
The last batch of restraint measures were only announced on July 27 and can hardly have had time to make their full impact on the economy. But they were considerable and far-reaching, and as I find that most people have forgotten them I will recount them: (i) Public sector: all capital expenditures slowed down; many non-industrial capital projects (excluding housing, schools and hospitals) postponed for six months; loan sanc- tion and grants refused for less essential local authority building; local council lending on mort- gage for house purchase cut from £180 to £130 million a year; government and local authority staffs reduced, various projected social reforms Postponed; government spending on defence to be cut next year by £100 million. (ii) Private sector: (a) capital: building licences now re- quired for large projects other than housing or industrial buildings; (b) consumer: maximum Period for hire-purchase contracts cut from three to two and a half years, which will reduce de- mand by about £65 million (following an increase in down payments from 20 per cent to 25 per Cent for cars and motor-cycles). (iii) Balance of Payments: exchange controls greatly tightened an and payment for imports not allowed before goods have been dispatched. This is a formidable list and I hope it will be extended by one very Important item- payment in cash on ordering
luxury or non-essential imports, such as carrots and ceci beans from California, lettuces from Belgium, path from Germany, caviar from Russia. This cash-down system had a marked effect on imports when tried out in Italy.
Now it may be argued that these measures should have been taken many months ago—I myself pleaded for (ii) (a) and (b) in the autumn of last year when the sterling crisis broke—but it cannot be argued that they will fail to let excess steam out of the economy. The pressures in the building industry have already been re- moved. There is no longer a shortage of bricks or cement or copper tubes. Indeed, the private sector house-building has declined enough to enable Mr. Crossman to plan an increase in public sector building. This is how the Economist sees the economic trends as a result of the Callaghan squeeze: total national output for 1965 only 2 per cent or 2{ per cent up and perhaps a further small rise of 1 per cent in 1966; consumer spending held down to present levels until next spring; investment (private and public) declining until the middle of next year; exports rising by 41 per cent and imports by much less—provided the import surcharge is kept on. The Economist is not usually kind to the Government, but here it is giving independent support to Mr. Callaghan's claim that he is re- ducing the excess pressures of demand.
It was clearly never the intention of the Chan- cellor to create a slump. As the Governor of the
Bank, Lord Cromer, told the feasting bankers: `It is no part of this overall [deflationary] process to seek unemployment of men or machines, but rather that there should be a redeployment to ensure that the vast productive capital investment in this country should be utilised to the greatest extent possible.' It is good to see that the Governor is now very well disposed towards the Chancellor's policy, but I wish that he had not gone on to say: 'In our present state of con- valescence we are under the constant survey of our foreign friends, who, for one reason or another, admire this country and wish us to suc- ceed. but question whether we really have the sense of purpose and the determination to do so. Any backsliding on our part which lays us open to accusations that we are putting social needs before financial responsibility would very quickly cause the leaves on. the plant of confidence to shrivel. Our foreign creditors overplay their hands if they think they have a right to pass moral judgments on our society or question the sense of financial responsibility of our Chancellor. If he fails, it is for us to throw him out, not for them.
If the Chancellor does not right the balance of payments in the time he has set himself it will be only because the wage-cost inflation proves intractable. Weekly wage earnings have risen this year by about 7 per cent and the fact that output will not rise by half as much implies that there must be a price inflation to meet the gap. But the Prices and Incomes Commission is only just beginning to take effect and there is no doubt that it has already helped to slow down the rise in prices. (The cost of living has risen only one point since the budget.) When the compulsory 'early warning' system is in operation we may break the back of this per- sistent problem—the wage-price spiral. Then the Governor's friends—our foreign creditors—may condescend to cheer instead of jeer.
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