Pre-budget assessment MONEY
NICHOLAS DAVENPORT
The Stock Exchange has been taking such fright at the budget that it is almost bound to stage a recovery when that-unpleasant event is past and the uncertainty removed. What has been alarming everybody is the story from Wash- ington that the IMF, our biggest creditor, is planning to send an investigating mission to London after 15 April to judge the 'adequacy' of the budget and, if it is considered tough enough, to offer us another stand-by credit to enable us to meet the schedule of our debt re- payments. What is deemed 'tough enough' is apparently a further dose of deflationary medi- cine equal to 1 per cent of the gross national product, or, say, £300 million. So let us enjoy our Easter holiday, for tomorrow we die.
On the assumption that the IMF have a press- cutting service and are anxious to know what the poor citizens of this debt-ridden country feel I wish to place on record that in my opinion M Pierre-Paul Schweitzer, the managing director of the IMF, should consult a psychiatrist and learn something about mass psychology. Anyone who practises applied economics with- out an understanding of mass psychology should have his head examined. The idea that you can activate the theory of Keynesian macro-economics in a reverse way, that is, that you can deflate demand by x by imposing addi- tional taxation of x on an unwilling and un- cooperative public, is mathematical nonsense. Mr Jenkins has tried it and has found that it does not work. His last budget, imposing addi- tional taxation of around £900 million, was in- tended to cut consumer expenditures by 2 per cent in the second half of 1968. It did no such thing. Sensing a further rise in prices the con- sumer wisely bought ahead and drew on his credit or savings. So Mr Jenkins imposed a further deflationary package in November of around £250 million. The public, feeling that prices cannot go much higher, or maybe running out of credit or savings, has apparently stopped buying ahead and is now showing its resentment in silly labour disputes and going slow on its work. Such is mass psychology.
There is plenty of evidence to suggest that the domestic motor trade and consumer durable trades are now heading for a recession. But this is not the way to run an industrial country. By restricting the home trade too much you in- crease costs and hurt the export trade. If mas, psychology were really understood the Chan- cellor would announce that the 'regulator' h to be cut. Consumption would immediatdy de- cline in anticipation of a fall in shop prices, the public morale would go up, output and pro- ductivity per worker would increase and the balance of payments would gradually improve. Would that not satisfy the IMF?
I am not suggesting that we tell our creditors to go to hell and repudiate our debts. But we will never pay them off—even on the post- poned dates—by destroying the industrial morale of our country. We need an encourating and save-incentive budget. We need to be told that the future is hopeful and not hopeless. Last week were published the final balance of payments results for 1968 which, although dreadful in deficit, are encouraging in trend. It will be helpful to have a look at the figures:
UK Balance of payments in million (seasonally adjusted)
1st half '68 2nd half '68
Imports -3,333 - 3,457 Exports +2,927 +3,176 Visible Trade Balance - 406* - 281* Excluding £54 million payment for us mili- tary aircraft.
The trading deficit for the year of £687 mil- lion looks—and is—shocking, but it is only 2 per cent of the gross national product. That great speechifier, Mr Fred Catherwood, the peripatetic Director-General of the NEDC, had some interesting comments to make on the de- ficit at a Northampton meeting on 29 Mara. Devaluation, he said, has worked as well as one might have expected that kind of macro- economic measure to work and should make a 'respectable contribution' in 1969, but it was not the answer to our difficulties. In his view our economic problem is not a matter of costs but of industrial structure. We used to enjoy a protected market in the sterling area—it took nearly 40 per cent of our exports in 1959 against 28 per cent today—but we now depend for our trade on a few highly advanced, high-wage, capital-intensive industrialised countries. It is a bad sign that we are not increasing our share of the American market, as Japan is doing. We have therefore got to specialise far more. The shift has caught us making too many things for too many failing markets. We are almost the only country of our size, he added, still attempt- ing to cover the export waterfront and 'almost certainly the one with the lowest degree of specialisation.' The logic of specialisation is that for every market we lose we have got to create another market. The faster we adapt our in- dustrial structure to specialisation the faster the balance of trade ivill come right. He ought to know, being Director-General of the NEDC.
Now this shift to specialisation is going on —the important mergers are helping—but it ?All take time. That is why the schedule of our debt repayments must be re-phased. Of the IMF drawing of $1,400 million of May 1965 we have already repaid $400 million and have $1,000 million to pay in five instalments of $200 mil- lion between May 1969 and May 1970. These must be postponed. There is another $1,400 million, drawn in June 1968, due between 1971 and 1973. It is in the best interest of the IMF to allow the re-structuring of British industry to come before the repayment of banking debts. It is in no one's interest to deflate British in- dustry further in the coming budget.
Mr Catherwood in his Northampton s-eech considered whether the Chancellor migot not buy time by restraining investment or putting a 5 per cent annual currency levy on the value of our portfolio investments overseas, which might bring in £200 million. In the last four years we have invested overseas (net of dis- investment) no less than £1,701 million, which is more than the last two drawings on the IMF put together (£1,166 million). As for the port- folio levy, the Treasury is already gathering over £100 million by its 25 per cent grab of the dollar premium on portfolio transactions. It is not impossible that Mr Jenkins will be tempted to intervene in the field of overseas investment, especially as the recent rush to set up 'off-shore' unit trusts is calling public attention to the lack of any control over investment overseas.
I conclude that the Stock Exchange will judge the budget in the light of its overall effect upon this vital task of re-structuring British indus- try by way of specialisation. If it decides that Mr Jenkins has been sensible, it will be found feverishly buying the equities of those com- panies which are already getting specialised for the export trade of the future. Some of these shares are already on a reasonable price-earn- ings ratio.
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