L JL - ECCHBEff 111 Ern
Mr. Callaghan's Day
By NICHOLAS DAVENPORT
THE planning of the public expenditure, which is the key to the control of the economy, has advanced a great deal in expertise since itt. in- auguration by Mr. Selwyn Lloyd in 1961 and*its bold development by Mr. Maudling in 1963. The White Paper* which the Chancellor presented to Farliament last week opened with a curt condem- nation of Mr. Maudling's efforts which, in the Government's view did not 'provide adequately for the nation's social and economic needs.' The burden of Mr. Callaghan's complaint is that Mr. Maudling's public spending would have absorbed over the next few years the whole growth of the revenue at the rates of taxation then ruling even if the economy had been able to grow as fast as 4 per cent per annum. This is a little hard on Mr. Maudling, who must have been following the advice of his senior civil servants, but it seems that there has been a Whitehall revolution.' I am sure Mr. Callaghan is fortunate in having the counsel of the brilliant left-wing economists who have abandoned Oxford and Cambridge for Great George Street. but one trembles to think what would happen if the next Tory government fol- lowed the Labour example and asked eminent economists—in their case, Professors Hayek, Paish and Robbins—to reshape the whole order Of government spending.
It is clear from the White Paper that a powerful and united team—ministers, economists and civil servants—have been at work on the replan- ning and control of the public expenditure. After a prliminary assessment of the growth of the national product they decided—as we now know so:newhat arbitrarily—to limit the growth of the public sector to an average of 41 per cent a year at constant prices up to 1969/70 and within this guide-line to allocate resources to each of the main public services after a strict review of their in- dividual programmes, in particular defence. This is the new technique of which the White Paper makes the boast that it introduces a true system of economic and social priorities.' By chance the arbitrary guiding line of 41 per cent did not clash with the National Plan but it did clash with the short-term deflationary plans for the correction of the balance of payments. Here Mr. Callaghan rose nobly to the occasion and has been able to claim a great personal success. In spite of the pressure from the spending departments he has managed to limit the increase in the 1966-67 estimates for the defence and civil votes (60 per cent of the total public sector spending) to no more than 1.8
per cent at constant prices compared with 5 per cent last year. It is a notable achievement.
It may be argued that it is unreasonable as well as arbitrary to fix the increase in public spending at 41 per cent at constant prices seeing that the economy as a whole is planned to increase at 3.8 per cent. Presumably a Labour government wants the public sector to grow faster than the private sector but as the public sector is labour-intensive and low in its productivity record, as the White Paper admits, the elimination of all wage and salary and prices rises from the calculation eat constant prices') means that the 41 per cent growth will understate its actual growth rela- tive to the private sector. And in spite of the White Paper protestation that the whole object of the planning is to see that the load of the public sector spending does not increase faster than the economy can bear there is no guarantee that it will not do so. For the control is very imperfect. In the first place, the investment of the national- ised industries is left outside the 41 per cent guid- ing line. Now the return on capital over the whole field of the nationalised industries is only 4.2 per cent. The lower the return, the greater is the call on the Exchequer. In the second place, about a third of the total public spending is done by local authorities (£3,639 million out of £11,576 million in 1965/66). While there is control over their capital expenditures through loan sanctions there is no government control over their current ex- penditures. And no one can claim that all local authorities are efficient as well as economic in their spending policies. Indeed, the reform and reconstruction of local government finance is the major task awaiting the new Government, which- ever it may be. I do not believe that the control of the public sector expenditure will ever be satis- factory until the capital formation is taken out of the national cash accounts and brought into a new capital budget separately financed. In the next four years—thanks to the stabilisation of defence at £2,000 million—the capital expenditures on houses, roads, schools, hospitals, industrial mod- ernisation, etc., are likely to increase by 50 per cent against an increase of only 15 per cent in the running expenditure on goods and services.
The White Paper on Public Expenditure,' Mr. Callaghan proudly told the House of Commons on Tuesday, 'shows that we have reshaped the pattern of spending in a constructive manner.' That will be conceded. The shift of resources has been designed to help investment and the balance of payments. No less than one-third of the total increase in output last year went into exports. But there has also been a shift into incomes by way of rising wages and salaries. This Mr. Callaghan seemed to excuse because of the reduction in the working week from forty-two to forty hours, but he admitted that incomes had been rising too fast and that consumer demand had been increasing at a rate 'inconsistent with the need to redeploy resources.' This had caused him to tighten up the hire-purchase terms and maintain the restraint of credit but he did not foresee the need for 'severe increases in taxation.' This was understandable on *Cmnd 2915. Public Expenditure: Planning and Control. the eve of a general eleCtion._ Even the best Of Chancellors on such occasions plays the politician. The new taxes on betting and gaming will un- undoubtedly be popular with women voters and, as they will pay for cheaper home loans, with the male heads of families too, who gamble away the household money. But I would not deny Mr. Callaghan his undoubted triumph this week. He was able to tell the House of Commons that he had improved the balance of payments without taking a sledge-hammer to cripple the rest of the economy. In spite of the corrective measures he had taken unemployment had actually fallen— in the year to February by 29,000—simply be- cause, he said, he had taken up the slack in em- ployment in the regions (by 28,000). As for the reserves, these had risen by £64 million since August after repaying £318 million of debt. After throwing in £316 million from the liquid portion of the treasury dollar portfolio the total was now £1,303 million—plenty, with the large credits available from overseas central banks, to with- stand any attack on sterling. Certainly, Mr. Callaghan is emerging as a tough, formidable and resourceful Chancellor. Who would now claim that the Treasury had been downgraded by the tiew Department of Economic Affairs?
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