THE ECONOMY
A prospect of smokescreens obscuring debts and dole queues
JOCK BRUCE-GARDYNE
iscovering a warning about the perils of excessive borrowing in the latest issue of the quarterly review from the National Institute of Economic and Social Research was rather like finding a tract against the demon drink in the Brewers' Almanac. It made you sit up and take notice. But then I suppose Mr Andrew Britton, the institute's director, was only acting as impartial host to his erstwhile Treasury colleagues Mr Odling-Smee and Mr Christopher Riley. It would be, to put it mildly, premature to conclude that the NIESR has been con- verted to the ways of fiscal godliness.
Not that there was anything strikingly novel about the Odling-Smee/Riley pre- sentation. Mr Tim Congdon of Messel's — to name but one authority — has for months been giving us hellfire sermons about the retribution lying in wait for us if we persist in adding to the burden of our debts and cloaking our misdeeds with North Sea revenues and asset sales. So what should interest us, perhaps, is not so much the context in which the Odling- Smee/Riley paper saw the light of day, as its provenance. For the official Treasury line is and always has been that income is income: and the fact that North Sea oil and public sector assets, once milked, will not be there for future milking in no way diminishes the propriety of treating them as reductions in the deficit just like taxes raised on drinks or smokes. Yet here we have two of the Treasury's more senior mandarins arguing that had we due consid- eration for generations yet unborn we would only be using about £23/4 billion a year of revenues from North Sea oil. The rest — currently almost £11 billion a year — would be allocated to the improvement of our national balance sheet by paying off debt. In other words, far from tolerating a growing budget deficit just so long as the national product grows rather more, we would be budgeting for a substantial sur- plus for the first time since the days of Roy Jenkins's Chancellorship.
This is not, I think, an argument that cuts much ice in the Treasury Chambers just now. It is true that the seasonal tales are circulating about the Chancellor's axe- men squaring up to a tare-knuckle fist fight' with the spending departments to cut £41/2 billion off next year's budgets. But even if these tales were to be taken at face value they would only be aiming at achievement of last March's projected de- ficit for 1986 of £7 billion, which is rather far removed from a surplus. In fact they conflict with other stories according to which the 'big spenders' have been almost embarrassed by the grace with which the Treasury has greeted figures which, as always, had been judiciously puffed up to provide for bargaining counters (and in- cidentally Mr Lawson's team must be relying on very short memories if they hope to convince Whitehall that last win- ter's run on sterling was provoked by suspicions of slack spending discipline rather than by their own apparent impati- ence at that time to cut interest rates). Time will tell which version is correct.
Meanwhile, to be fair to Messrs Odling- Smee and Riley, they do concede that, notwithstanding their strictures about a legacy of indebtedness, a case could be made out for souping up the deficit, on the grounds that unemployment might also be regarded as a potential charge on genera- tions yet unborn. If by extra spending we could cut the dole queues, they suggest, then our children might look more kindly on the debts bequeathed to them.
Unfortunately it is hard to see this reasoning being much to the Chancellor's taste either. It smacks of the Keynesian heresy of 'full employment budgeting'. According to the Chancellor, the key to cutting unemployment lies in labour mar- ket flexibility: as Jim Callaghan used to tell us, it's no use trying to spend our way back to full employment — it no longer works.
Yet while there is no sign of any recep- tiveness to the main Odling-Smee/Riley thesis — budgeting for a surplus — there is a case for their high-spending alternative which might turn out to have appeal. According to Mr Christopher Johnson, Lloyds Bank's chief economist, the Treas- ury is hung up on the figuring of Mr Lawson's Medium Term Financial Strategy, and doesn't know how to get off it, dearly though it would like to.
Surely not. The counter-inflation guide- path laid down in the MTFS, after all, lay through a shrinking Budget deficit which would marry falling interest rates to a tapering supply of money. The exchange rate was 'exogenous' — i.e. for the markets to decide as the fancy took them. Now Mr Johnson may have been dazzled by the rhetoric. Or perhaps he agrees with the CBI that the Chancellor must be neglecting the exchange rate still, or else, like them, he'd be desperate to get it down. Whichever the explanation, I don't think Sherlock Holmes would have given high marks for logical deduction. For the evi- dence suggests that the exchange rate is in fact the dial on the dashboard which the Treasury is really watching. Only not out of concern to get it down, but rather out of concern to keep it up, as the best available brake on over-indulgent wage-bargaining in the private sector.
Now obviously one way to keep our pounds looking perky is to encourage foreigners to lodge their cash in sterling. But we cannot very well do that if at the same time we are borrowing less overall: whereas American experience demon- strates that there is no shortage of foreign lenders around these days if you are in need of them and prepared to pay a fancy rate of interest for the privilege. Of course the Americans are by now fed up with the impact of the resultant dear dollar on their sales at home and overseas, and so are by no means sorry to see the foreigners take their cash elsewhere. But that might be deemed all the more reason for us to try and get it here instead. Obviously this is a hand to be played with care. We are not the United States, and were we to sit back and let deficit spending rip as the TUC (bless their hearts!) would have us do, potential lend- ers would take fright. Equally, while the Chancellor is understandably impatient with the CBI's clamour for an easy life, he's not going to risk a repetition of the slump of 1980-81 with a general election beginning to loom over the horizon. What all this points to, I suspect, is a pattern of smokescreens. Stern words about the need for discipline in public spending, coupled perhaps with a discreet- ly relaxed attitude towards the pre- emption by the spending departments of quite a lot of his £6 billion piggy-bank, the `contingency reserve' pencilled in for next year. Regular displays of resistance to pressure for lower interest rates, were coupled with a willingness to 'go quietly' if the markets insist. It could be quite a clever formula. Even the National Institute now thinks inflation could be down to 31/2 per cent by Christmas 1986. Nobody seriously imagines that earnings will have moderated equally. It may not be an outlet that promises either smaller debts or shor- ter dole queues for our children. But it is an attractive prospect for the majority of us with jobs to keep us out of mischief. And votes, when the moment comes.
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