MONEY The budget reflation
NICHOLAS DAVENPORT
The pre-budget White Papers painted the economic backcloth for Mr Barber's massive tax-reform performance on Tuesday. Last year the gross national product advanced by 94- per cent in money terms and by only per cent in real terms. Yet the workpeople employed on the product managed to push their pay up by 12 per cent. This is the new rake's progress. The gross trading profits of the employing companies were no higher in money terms than in 1968 and in real terms fell by 81 per cent. So illiquid did they be- come to their net 'acquisition of financial assets' declined by £1,229 million. No wonder they now expect to invest 2 per cent less this year—perhaps 10 per cent less according to some. This explains the rise in unemploy- ment to over 750,000. By putting up the unit cost of output by 12 per cent last year the workers were deliberately destroying the investment which would underwrite their future employment. The 'mindless militants' was an apt description of the leaders of these self-destructive unions.
The first and obvious budget step to improve company profits and investments was to reduce Corporation Tax. This Mr Barber took. Corporation Tax had already been cut from 45 per cent to 421 per cent and now a further cut to 40 per cent was announced. In itself this was tiny—barely £100 million—but Mr Barber followed it up
by declaring that SET would be cut by a half from 5 July. This of course only benefits the companies paying it—stores and shops, the distributive and service trades and builders are the chief beneficiaries, as they were the chief sufferers—but insofar as it tends to reduce prices and slow down the inflation the whole business world will benefit. Nor is that all that Mr Barber offered. He told companies to look for a rise in turnover. He would take steps to see that the growth of the economy would advance from 2 per cent to 3 per cent. As industrial capacity is already said to be rising at 3 per cent this would not have any immediate effect upon employment. In fact unemployment may still worsen for a time. But it is something to hear a Chan- cellor saying that he intended at long last to reflate the economy.
Incidentally, a rise in economic growth from 2 per cent to 3 per cent requires a refla- tion of around £400 million. Whether Mr Barber has done enough with his various little tax reliefs and cutting SET by half (the total SET cost £600 million) is something which I have not yet had time to work out but is a step in the right direction. I would say that the budget will definitely reduce the gloom in the business world and induce the board rooms to contemplate an increase in investment to match a coming rise in turn- over.
The major tax reforms which the Chan- cellor announced will go far to encourage the entrepeneurs, especially those in the top bracket. The coming abolition of surtax and the grading of income tax up to a ceiling, which is to be 75 per cent of high incomes instead of the 91 per cent at present exacted is a sensible reform which has been far too long delayed. But it will not seem so sensible and desirable to those with low incomes. The awkward thing about tax reform as well as tax reduction is that it benefits most those who pay most. But that does not destroy its economic logic.
The troubles about national economic today is that when logic is applied without regard to the national psyche it becomes a dangerous weapon. We are now suffering from a raging wage-cost inflation brought about by massive and ridiculous wage claims.
In the old days it was thought that you could bring the wage-earner to his senses by throw- ing him out of work. This has been proved wrong. Wage claims have been mounting while unemployment has been rising. Mr Barber recognised this aberration by declar- ing in January that he would not apply this stricter money supply policy—the cost in bank- ruptcies, loss of output, and investment, and much higher unemployment would be too great. In other words he realised that he could not bring the trade unionists to their senses by creating an unemployed army of two million. But he should also have realised that it was important to appeal to the good- will of the moderate trade union leaders by making them feel that he was working for their good—an improvement in real wages by a reduction in prices. The coming cuts in SET may help to bring some prices down- Sainsburys have said they would act on it in their super stores—but Mr Barber failed to announce the reduction in bank rate which must be the forerunner of a general fall in the price level. I feel that in his tax-reform- ing zeal he failed to take into account the psychology of the working class. Certainly he could not have announced any direct benefit for workers, seeing they have been able to grab for themselves an increase of some £2,000 million in their pay last year, but he might have realised that they would be very sensitive to the fact that his tax reforms would benefit only the better-off half of the nation. Even the increased pen- sions would probably have to be paid for mainly by increased contributions from those at work.
As for such refinements as a separate taxa- tion of wives' earnings and the allowance of children's investment income to be taxed separately from the parents'—these will be regarded cynically—the first as a sop to the Women's Liberation Movement (and their votes) and the second as in aid of the public schools.
This Marxist sensitiveness will be height- ened by the boon on the Stock Exchange which I expect to see following. There were certain technical factors, such as the aboli- tion of the short-term capital gains tax and its substitution by the 30 per cent gains tax, which appealed directly to the Stock Ex- change, as it will mean a boost to its turn- over, but the direct help to company profits and investment should mean that the Bear Market which has lasted nearly two and a quarter years, should at last be brought to an end. The gilt-edged market can also look forward to a reduction in bank rate. This must not be further postponed, if the reform- ing Mr Barber would gain the confidence of the moderate trade unions.
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