MONEY Barber's strategy for disinflation

NICHOLAS DAVENPORT

If this column keeps harking back to the infernal inflation problem it is not because I am obsessed with it—of course I am and any one dealing with applied economics would have to be—but because I feel you are not obsessed enough. For this is a crisis of capitalism. It is a much more serious crisis than that of the nineteen-thirties. While that earlier breakdown in the capitalist system was unpremeditated this one is more sinister and is certainly premeditated by the revolu- tionaries. To destroy the capitalist system, said Lenin, you must first debauch the currency. The wage explosion is debauching the currency and that is exactly how the revolutionary Joneses, Scanlons and Jenkinses (Clive not Roy) like to see it. After all, the Labour party was originally created to destroy capitalism and the revolutionaries are merely carrying on in the old socialist tradition. But the awkward turn for them is that a majority in the nation have recently voted to say that they don't want to debauch the currency, that they are fed up with con- stantly rising prices in the stores, that they want to put a stop to this galloping inflation. (Think of it! A 7 per cent per annum com- pound rise would double the price level in just over ten years.). Probably a majority of trade unionists are equally fed up with hav- ing constant strikes to try and keep ahead of the rise in prices for a few months. They must feel pretty desperate to jeopardise the health of the whole nation, physical as well as economic, in order to get at the head of the senseless wage queue. It's a mug's game and the average striker must surely know that he is being taken for a ride—to nowhere

or perdition. As the prophet Haggai said in a former inflation: 'He that earneth wages earneth wages to put it into a bag with holes.'

As the Tory government was elected to put a stop to the inflation those of us who are not revolutionaries privileged to preach our docq trine in the Times should be trying to help Mr Barber do his disinflationary job. We should not be throwing bricks at him for cut- ting government expenditure and charging more for health services. His is not a reac- tionary exercise—the Labour government has done it before—but part of the Tory strategy for killing the inflation. Let me explain what that strategy is and the course it should take.

The first step is to cut income tax next April, which he is going to do by sixpence. Over-taxation has made the worker angry and disinclined to increase his productivity. When he asks for another 40s a week he knows that the Government will perhaps take 12s and the inflation another 8s. So he is persuaded to ask for double and sulk. This bad psychological atmosphere must be changed. As soon as he knows that sixpence is coming off income tax the worker, will say to himself: 'Well, for the first time here is a government trying to make the £ in the wage packet go further. Perhaps they really mean to stop the rise in prices.'

Now the Chancellor cannot immediately take sixpence off income tax because it would add to the inflation, creating extra demand for scarce goods. So he had first to reduce the existing claims on scarce resources by cutting down government expenditure. This

ffolkes's investors' alphabet M is for Market trend

is an exercise in the interests of us all

workers and wives especially, for it will stop a wage-cost-push inflation becoming a de.

mand-pull inflation. The first cuts come naturally from the streamlining of the Whitehall machine, which will please every-

one except the vested interests of the civil

service. When overlapping departments are eliminated, when unnecessary jobs are wound up and others hived off to outside

agencies, we might even get better govern- ment. But the ending of free milk for the

over-sevens and the charging more for pre- scriptions, spectacles and dental treatment will not be popular. However, provided the

very poor are given extra through supplementary benefits or a negative income tax, social justice will be preserved as well as money saved.

But the biggest cuts—and the most popular except on the Stock Exchange—will be those withdrawing support from private industry. At the moment over £600 million is poured out on investment grants. These are to stop immediately and a new system of depreciation allowances is to be worked out.

Corporation Tax is to be cut from 45 per cent to 42f per cent to help investment. The White Paper on public expenditure published

in December last year revealed that apart from agricultural support and the research councils no less than £1,151 million was de- voted to 'assistance' to industry in 1970-71. In future, according to Mr John Davies, Minister `Moriturus' of Technology, in- dustry will have to stand on its own feet. It is significant that Mr Barber proposes to cut expenditure by £1,100 million over the next five years.

This White Paper disclosed the costly effects of the 9 per cent increase in public ex- penditure which the Labour government allowed in 1967-68. Leaving out the capital spending of the nationalised industries and debt interest the total was £15,317 million of which the social services took £7,028 million. Mr Barber revealed that if Labour's pro. gramme of expenditure had continued unaltered for the next few years the rate of taxation would have to be increased by more than £300 million which would have put sixpence on the income tax. 'It means', he said, 'that a considerable reduction in public expenditure is needed to prevent a rise in the rates of taxation.' This has happily been achieved and we can now look forward to a cut of sixpence in income tax next April without adding to the inflationary trend. The final step in the disinflation strategy is to abolish SET and proceed to an actual reduction in the price level. This would in- volve a positive reflation of the economy and cannot be undertaken until the wage ex- plosion has abated and the increase in wage and salary incomes has been brought down approximately to the rise in productivity. When it comes to this stage council rents could be lowered by a reduction in the rate of interest. All this would help to bring down the price level and reassure the worker and his wife that the Government means business in its disinflation strategy. What a change in the psychological climate Mr Barber has made. Instead of neurotically ask- ing for inflationary wage advances the trade unions might be now induced to become reasonable. Only the revolutionaries would then be left to denounce such a consensus and advance wage claims which are destruc- tive of the capitalist system and the mixed economy. These would mean strikes which the Government would have the full support of thevommunity in fighting to the death.