THE ECONOMY
The table talk of a Whitehall warrior
JOCK BRUCE-GARDYNE
Itook time the other day to take a well-known Whitehall warrior out to lunch. I seized the opportunity to perform my best Cassandra impersonation about the fate awaiting us if we didn't do some- thing soon about the credit boom. I trotted out the delphic warnings of Mr Leigh Pemberton, the governor of the Bank of England, about the 'glacier' of money waiting up there on the mountainside, threatening to engulf us all in an inflation- ary avalanche if ever a thaw sets in. I ruminated about the exposure of the banks and the building societies as they accumu- lated more and more impressive mortgage loan portfolios, should the housing market, for whatever reason, break. I called in evidence the Prime Minister's well-known memories of what happened in the days of her youth to the ladies of Grantham who overspent their housekeeping money. I gave him the works, in short.
My warrior, understandably, grew impa- tient. 'OK, OK,' he finally butted in. 'And What precisely would you have us do?' I took a deep breath, and offered a couple of modest suggestions. What about reviving hire purchase controls? We abolished them in 1982, when I was at the Treasury. The mandarins had assured us at the time that the impact of abolition on the volume of credit transactions would be little more than marginal. After all, hire purchase was essentially confined to the 'unbanked', a dwindling band. It was really no more than a logical tidying-up operation. Or so we were encouraged to believe. It did not work out that way. The ensuing boost to consumer credit has been distinctly im- pressive (maybe the mandarins knew more than they let on). Hence it seemed logical to suppose that the reimposition of hire Purchase controls would now have a signi- ficant effect, but in the opposite direction. For my second suggestion I was indebted to Lord Vinson, one of the founding fathers of (and still a leading light in) Lord Joseph's Centre for Policy Studies. Lord Vinson's proposal, as I explained it to my warrior, was that the Government should take power to restrict the ratio of mortgage advances to, say, 90 per cent of the Purchase price of a property. I rather expected to be told to grow up: to be reminded that, whatever the merits 9f such suggestions, they were simply incompatible with the present Govern- ment's whole philosophy. But I was not. Instead my warrior told me that 'at least Nigel Vinson's proposition is aimed at the right target — which is more than can be said for yours. For it's not credit cards or consumer credit which are the worry: it's housing finance.'
My only excuse for boring you with all this table talk is that I believe my warrior's response may be symptomatic of a subtle change of mood in the Whitehall village.
It cannot be repeated too often that our present Chancellor is a pragmatist to his finger-tips. Anyone who imagines that he would suffer the pangs of a pilgrim in mortal sin at the very idea of a return to physical controls simply does not under- stand Mr Lawson.
He is also worldly-wise. He knows very well that credit rationing as practised by the governments of the Sixties and Seven- ties (and still advocated by the Labour Party today) would never work in today's deregulated and internationalised financial market-place. A 'Vinson' scheme to limit mortgage/house price ratios, by contrast, undoubtedly would work — not least because UK building societies and banks would be enchanted to be released from the current pressures upon them to emu- late the ratios of 100 per cent (or even 110 per cent) of purchase price now on offer to would-be mortgage borrowers from some of the US banks. But this would be, essentially, a 'prudential' measure. It could not be expected to make a dent in the monetary dimension to the credit boom.
Here the most obvious response — a suspension of mortgage interest tax relief in respect of new contracts — is presum- ably ruled out by prime ministerial veto (although Nigel Lawson's powers of per- suasion, when he sets his mind to it, should not be underestimated — as we have been recently reminded). So what about the return of our long-forgotten friend, 'Sche- dule A'? For the benefit of those who joined the party sometime after the early 1960s, this was the tax which used to be paid by home-owners on the 'imputed value' they were deemed to receive from the rent they did not pay, and which their homes would have earned in the open market. It was a perfectly logical tax (and incidentally all the more logical now that our one remaining property tax — the rates — is on the way to the knackers' yard). Furthermore it got the chop in a most unusual — indeed unique — manner. The Macmillan government was stampeded into abolition of Schedule A by the Tory Party Conference. Could Mrs Thatcher be persuaded to preside over its reintroduc- tion? It seems most unlikely. But stranger things have happened.
Now the Prime Minister and her person- al advisers would no doubt continue to insist that 'wizard schemes' of this ilk would do no more than tinker with the symptoms of the malady. The cure for too much borrowing, they would argue, was, is, and always will be, to up the cost (although whether in practice the Prime Minister would view the resulting hike in mortgage rates with equanimity is, perhaps, another question). Old unrecon- structed monetarists amongst us might well murmur, 'Amen to that!' But the point is that, for the moment at least, Mr Lawson is not heading down that road. Of course if Alan Greenspan and the US Federal Re- serve were to take the lead in raising interest rates, he would follow with alacri- ty. But — particularly after the US Febru- ary trade returns — that does not look to be on the cards just now. So meanwhile? Schedule A? Borrowing limits on mort- gages? Even hire purchase controls? Even, even, a suspension of mortgage relief? I think we might be ill-advised to take it for granted that any or all of these are beyond the pale of civilised discussion in the corridors of power.
There's just one snag, though. Any, or all of them, would require 'primary legisla- tion'. A mini-Budget, in other words. And while Mr Lawson has no digestive trouble whatsoever over switches in tactics or strategy, he is, I think, much more squeamish over presentation. In the care- free days of Opposition he used to have lots of fun with Denis Healey's propensity to churn out mini-Budgets. He would take an awful lot of persuasion to risk compari- son with that experience. So we'd better hope that glacier stays intact.
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