At the End of One's Tether
By NICHOLAS DAVENPORT
Jr was ungenerous to impute Lord Ritchie's outburst to fury at a capital gains tax which has not yet even been defined. He was speaking at a conference of the Wider Share Ownership Committee, presided over by the Prime Minister's son, Mr. Maurice Macmillan, who takes this question of a property-own- ing democracy very seriously—too seriously for my thinking. As chairman of the Stock Ex- change Council Lord Ritchie had a perfect right to protest that risk investment and the freedom of the capital markets were subjects which the Government constantly ignored or bedeviled. For example, to quote Mr. Paul Chambers, the tax system gives 'a whole forest of special reliefs to almost every form of saving except savings invested in the risks of private enterprise.' Yet it is risk investment alone which makes the capitalist system tick, and without a free market ri■k investment could not survive. If father and ,on ever have a fireside chat together I hope that Maurice will ask whether the Government call), expects the London Stock Exchange to become the principal capital market of the European Economic Community while the reasury maintains a 2 per cent. stamp duty on transfers of capital. (I presume that foreigners will be exempt from our capital gains tax.) There is no other Stock Exchange in the West which has such a tax. The Exchange Council is doing its best to rationalise the system of trans- fers, but the 2 per cent. stamp duty .(light- heartedly raised from 1 per cent. by the late Lord Dalton when Chancellor) is the great stumbling-block and while it exists the London Stock Exchange is 'out.' For technical reasons alone the tax should be reduced here and now to # per cent.
I was not at all surprised to hear Lord Ritchie say that 'the City has very nearly reached the end of its tether.' Treasury policy with its 'stop- go' monetary techniques is driving us all mad. If we thought that this policy was intelligent and effective we would not grumble, but we are all convinced by now that it is unintelligent and ineffective. We have watched Mr. Selwyn Lloyd solemnly deflate an economy which he said was suffering from an excess of demand when we all knew that it was suffering from a wage-cost in- flation which the wage-pause came too late to prevent. We have listened to Mr. Barber and Mr. Erroll talking darkly of the great 'expan- sionary forces' of 1962 and we discovered that they meant nothing but a longed-for rise in world trade! By the way, what Treasury 'expert',could have convinced Mr. Barber 'that 1962 will see a considerable increase in world trade' when world trade is still being handicapped by low com- modity prices and a liquidity shortage? Again, What Treasury 'expert' could have told Mr. Erroll that 'the expansion of the economy which We foresee this year would go badly wrong if demand were allowed to grow in advance of exports' when everyone outside the Treasury knows that the 12 per cent. jump in exports in 1959 was secured after Mr. Amory had given the economy a boost of tax relief and 'reflaiion' in 1958? There is little doubt that British ex- ports are stagnant today, first, because home trade is stagnant and because the Treasury has increased British industrial costs by holding output down; secondly, because it has taken the heart out of the exporter by its depressing, de- flationary policies at home. It is not only the City but the average businessman who has 'very nearly reached the end of his tether.' Exporting is hell, Mr. Macmillan.
Again, 'consider the maddening untethering effect of the Treasury's Bank rate policy. It was raised from 5 'per cent. to 7 per cent. last July because of the exchange crisis. With IMF help this crisis was quickly overcome and sterling became and remained strong. Yet it has taken nearly eight months before Bank rate was restored to 5 per cent. It has been lowered slowly by stages of per cent. That is part of the ridiculous Treasury mystique. It always goes up by whole points and down by halves. A rise in Bank rate is the great red warning light, telling wicked businessmen to go slow and greedy workers to drop their wage claims.. If it were to change too quickly to green it might give these naughty people the wrong ideas. The truth is that both employers and workers. regard the whole mystique as a bad joke. A high Bank rate has two direct effects: first, it causes un- wanted 'hot' money to flow to London from foreign centres to take advantage of our high interest rates; secondly, it puts up the cost of industrial borrowing and tends to discourage much-wanted industrial investment. Why, then, did the Treasury delay so long before restoring Bank rate to a more normal level? To borrow as much as possible from foreign bankers at the most expensive rate? Or to make sure of an industrial slump at home? The truth is that.it did borrow call money at over 5 per cent. sufficient to pay off £225 million of the IMF period loan which was costing under 2 per cent.! The truth is that in the last quarter of 1961 in- vestment in manufacturing industry did fall by 10 per cent. and that orders for industrial build- ing did decline by nearly 24 per cent. as com- pared with the average of the previous three quarters! All this does not make sense to the simple businessman, whether he is in the City or not.
If Bank rate comes down further to 4 per cent.- which it may well do while our Treasury bill remains at nearly 41 per cent. and the American at 2.7 per cent.—it will be a mark of failure for Treasury policy. It will mean that it mistimed its deflationary measures and carried them too far. It will mean that its guesses about the expansionary forces of 1962 were wildly wrong and that the world export trade of manu- factures is not being impelled, at the moment, by such strong forces as it imagined. The dismal fact remains that our industrial production is stagnating and that, in spite of the recovery in the motor trade, the index for January (season- ally adjusted) was the lowest industrial output for any month since February, 1960. There is no sign yet of Mr. Erroll's boom in exports.
The exasperation felt at the failure of the Government to produce an economic policy which will allow the economy to grow without upsetting the balance of payments is surely the reason why so many businessmen like Lord Ritchie feel at the end of their tether. I am sure they would all cheerfully pay a capital gains tax if they felt that the economic climate could change.
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