Skinflint's City Diary
I am a man of balance, said Thomas Mann, I instinctively lean to the right when the boat threatens to capsize to the left and vice versa. Skinflint knows the feeling well and also distrusts economic fashions which are embraced universally. When everyone is in unwonted accord I always ask why the opposing view has gone by default.
There is now almost frightening uninimity on the need to restrain public expenditure. When Denis Healey agrees with Sir Keith Joseph, when the Labour cabinet thinks the same as Sir Geoffrey Howe, when the National Institute of Economic and Social Research and the Confederation of British Industry are in accord with Wynne Godley and all the stockbrokers' circulars, then something very unusual is happening. It seems almost sacrilegious to doubt such consensus but the arguments are not quite as watertight as they seem, and since you will not find them questioned anywhere else, Skinflint thinks the contrary case requires an airing here.
The case against the current levels is at both the spending and the cash-raising level. One point is that excessive state appropriation of cash will starve commerce and industry of the capital needed for the coming upturn. This is gloom-forecasting of a grand order since overall shortage of money has not been a constiaint on the growth or prosperity of British industry.
There could be justified complaints that the financial institutions have been misguided or myopic in the companies they backed; they can justly-be aceused of over-emphasis on safety, short-term profits and apparent predictability; they dart be'Called greedy; but in total their coffers have not been too shallow. Several
studies have shown that funds were available even when some companies complained of being kept short. It would need the redirection of much larger proportions of cash before companies were starved of development capital.
Another argument-is that excessive spending leads to excessive tax. But according to a survey carried out by the CBI, the UK is not grossly out of line with comparable countries in the average level of taxation. We may at 98 per cent, have the highest marginal rate in the developed world, and there may be other oddities, but overall British rates are roughly equivalent.
If the discrepancy is not raised by taxes, runs the argument, it must be obtained by borrowing and that increases money supply or drives up interest rates or accelerates inflation. Or all three. The cash shortage sometimes is part of this thesis. In fact, though, the effect of the public sector borrowing requirement is more dependent on where the money, comes from than on how much it is in total.
If the government were to borrow from the banks, money supply would indeed be inflated since the banks' liquidity ratio would be increased by the amount and hence multiply their lending ability by eight times the sum lent, at the same time as the money borrowed by government was also coming into circulation. But if the government's money comes from sales of gilt-edged stock, it merely drains into the public hands the current high savings. This does not affect money supply.
This is the course recently taken and the speed with which tap stock has disappeared has encouraged the Treasury to continue the policy. To accelerate the process the Bank of England drove down interest rates and the sales of gilts have shot ahead. Which answers the interest rate point, at least temporarily. Overseas borrowing, claims the Treasury, affects money supply not at all because of the curious workings of the exchange equalisation account.
So much for the case against public spending. As you may notice, it is not quite as watertight as has been pretended though to be fair this has been a much abridged version of the case. One can however even put forward an argument in favour of continuning present levels of expenditure. For one thing the public sector is much more labour-intensive than the private so any Cut will lead to a sharp increase in unemployment which is not only socially undesirable but expensive for public funds.
Then there is the point of what happens to the money if it is diverted from the public to the private sector. Assuming that a large portion ends up in people's pockets something like 13 per cent would be saved which would not onlY inflate the building societies' coffers to embarrassing size, but also aggravate the present depression through loss of demand, And as for the rest, it would probably go on consumption.
That in turn would not only increase imports, but put consumer demand into sectors not geared to cope with it. All in all there is little reassurance that putting the spending int° private hands would substantially improve the present situation.
Don't get me wrong — I am not advocating more expenditure, nor am 1 seriously defending the current levels. But blindly to demand public sector cuts without thinking through the other side of the case could result in nothing more than getting us out of the frying pan. It would be far more intructive, but much harder work, if some of the economists would turn their attention on value-for-money in the
Public sector and thereby see what could be prevented from needing even more money.
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