THE ECONOMY & THE CITY
The New Cuts
By NICHOLAS DAVENPORT
Iits latest survey of the British economy, the 'OECD, the economic organisation of twenty- one nations, meeting in Paris, had this acid comment to make : 'The UK has suffered not from too much stop-go, but rather from too much go-stop.' It implied that too little attention had been paid to the dangers of trying to reflate too far and too fast. And it concluded: The pres- sure and pattern of demand generated by the expansionary measures taken in 1962 and 1963 proved too great for price stability and balance of payments equilibrium to be maintained.' This is a caustic indictment of Mr Reginald Maud- ling's much-praised reflation policy and it gives Mr. Harold Wilson the opportunity to tell the public that not only did his government inherit the worst balance of payments crisis in history, but' the most reckless programme of public spending ever planned. So the Chancellor of the Exchequer had Tory extravagance to blame in support of the new measures he announced this week to bring our overstretched economy back into balance. It is a strange political world when a Labour minister is able to accuse his Tory opponent of having indulged too freely in public spending.
There is no doubt that the failure of Mr. Callaghan's deflationary measures to remove the economic overstrain stems from the relentless pressure of the Government's heavy spending programme in defence, roads, building, elec-
tricity, gas, water and other public services. Defence is now to be cut by £100 million next year and by £400 million by 1969-70. Public ex- penditure on houses, schools, and hospitals is to be contained within the existing programme. Other non-industrial capital projects are to have their starting dates postponed for six months (except in the high-unemployment areas). Cur- rent projects on civic buildings, swimming pools, etc., are to be banned and council lending for house mortgages is to be restricted to £130 million a year (it had risen to £180 million). Finally, local authority drawings from the PWLB are to be phased. All this is to the good.
The sector of public spending which had clearly been getting out of control is local govern- ment. The latest volume (No. 39: July) of finan- cial statistics reveals this alarming rise in their capital expenditure (gross fixed capital formation plus capital grants to persons plus net lending for house purchase): 1963-64, £1,069 million; 1964-65, £1,267 million—a rise of nearly 20 per cent. A bad feature of this spending has been its reliance on temporary finance. Local authority borrowing (net of repayments) in the March quarter was no less than £330 million—more than double that in the previous quarter.
Here I must draw attention to the fact that it has been all too easy for the local councils to raise this short-term money because the life assurance companies, having been driven out of the gilt-edged market by the Chancellor's capital gains tax on switching, have been only too willing to employ their funds in the mortgage market at the extremely high rates of interest offered (up to 8 per cent: now 6 per cent). All this points to the danger of allowing the local councils to borrow at cheap (subsidised) rates for housing unless the central government takes steps to control their other expenditures. This it is now proposing to do. Moreover, it is postponing the scheme for low (subsidised) rates of interest for owner-occupiers. No one, least of all the Minister of Housing, wants to see house prices driven up further by an increased public demand arising from subsidised council mortgages. The time has come, as Mr. Wilson said, 'to make more effective the discipline of control over public expenditure both nationally and locally.'
As regards the private sector the Government is at last doing what I begged it to do six months ago—stiffen up the hire-purchase terms (the maximum repayment period being reduced from three years to thirty months) and introduce a licensing scheme for construction projects of £100,000 or more (with the exception of housing projects and industrial building). Office develop- ment is also being brought under control in the Birmingham area (as well as London) and In- dustrial Development Certificates will have to be obtained in the Midlands and the South for any industrial development exceeding 1,000 square feet.
Finally, exchange control is to be tightened up. No direct investment outside the sterling area will be allowed at the official rate of exchange. All approved projects will have to be financed by investment currency (the dollar premium is now 14 per cent) or by borrowing abroad. The Bank of England is also to control borrowing in this country by foreign companies and to limit
banking facilities for financing imports of man't' factured goods, etc. Imports cannot be paid for in future until the goods are shipped. (This pre' vents one of the major 'leads?) All these, measures are estimated to produce at least f‘b million of official exchange in the next year. At the same time exports are to be further assisted bY reducing the qualifying contract value from £50,000 to £25,000 for the ECGD guarantee. It seems to me that the Government is at last getting down to a Davenportian economic polieY without the cheap money—building licences, h.p. controls, and phased public expenditure. 00 capital account the public sector accounts fa; nearly 45 per cent of the total national fig° capital formation. This is a large enough percent' age—if properly controlled and phased—to kee? the economy moving on an even balance. It it far better to vary this public spending in accord' ante with the balance of payments needs of the time than to try to cure a deficit by a Lloydian deflationary `stop'; that is, by heavy unemplo/fr ment. Nevertheless, these new cuts in spending, will probably cause unemployment to double and to exceed 600,000 before the end of the year. In the light of the Chancellor's statement this week, how irrelevant to our economic needs seems that revolutionary Finance Act of 1965!
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