THE ECONOMY
A nasty little spot of turbulence
JOCK BRUCE-GARDYNE
T he destroying effects of incentives to savings.' Did my eyes deceive me? Could this really be a senior member of a Cabinet dedicated to the propagation of Victorian virtues such as thrift? Well, indeed it could: our Chancellor, no less. And the object of his homily was, of course, those thrifty laps.
It is one of the engaging paradoxes of the world in which we live that just as the industrial world transfers resources from the large majority of its population em- ployed in industry and services to its small minority of farmers to help them generate surpluses, and the developing world trans- fers resources from the large majority of its population employed in agriculture to en- hance its shortage of foodstuffs, so the Jap- anese, with the highest savings ratio in the world, subsidise savings.
So Nigel Lawson had a fair point in Washington this week. But it has — or ought to have — a counterpoint. If the overthrifty Japs should be enjoined to eli- minate their fiscal bias in favour of exces- sive savings, what price our fiscal bias in favour of excessive borrowings? Let the Japs scrap their tax relief on lendings, and in exchange we'll scrap our tax relief on borrowings — notably, though not exclusi- vely, in the name of housing finance.
That was not, of course, the fair ex- change offered by our Chancellor. It was not in his gift — any more than the Japa- nese were likely to respond to his lecture. More's the pity. For are we not in some small danger of a repetition of the unhappy saga of the 'Barber boom' of the early 1970s?
As this issue of the Spectator went to press it began to look as though those wi- zards at the Bank of England, with a hel- ping hand from brother Kraut, might have succeeded in heading off a rise in our inte- rest rates. The 'megaphone diplomacy', between James Baker of the US Treasury and the German central bank governor Pohl, has been silenced, and we can all breathe again.
For how long? Down in Threadneedle Street, they do not sound quite so sure that our bttered pound has simply been the vic- tim of the loose talk of recent weeks. The Bank's latest Quarterly Review last week- end reckoned that credit conditions were `difficult to interpret'. It was not prepared to go beyond the proposition that there was 'little scope for unilateral relaxation' of interest rates. But then the Quarterly Re- view is censored — by the Treasury. Go- vernor Leigh-Pemberton had himself been distinctly less inhibited. Ten days ago he drew to our attention one or two items of concern. Viz: that household debt has soa- red, since this Government took office, from 40 per cent of the housekeeping cash to 70 per cent. Viz: that whereas seven years ago we would have been lucky to find a bank or building society prepared to lend us twice our income, even with the backing of a home, today we'd get three times our income and no bother. Viz: that whereas when Mrs T took office we would have scratched around to find a bank or building society to put up half the price of a house that took our fancy, nowadays we'd be of- ferred 95 per cent (or indeed, as I have instanced recently, more than 100 per cent) of the asking price for a bijou residence in Brixton from several quarters all at once. Viz: — and this is the most sinister of the vizes — that in 1979 inflation rising to- wards 20 per cent was turning our debts into sand; whereas in 1986 inflation falling towards 2 per cent was setting them in concrete.
We are, in the Governor's estimation, in hock up to and beyond our withers. The vast bulk of our personal indebtedness is happily secured against the enhancing value of the housing stock for which most of it was borrowed. But there are two snags. One is that it is exposed to a change in trend. For 20 years and more the banks subscribed to Mark Twain's proposition that agricultural land values could only go one way since 'they don't make it any more'. With land values slipping by up to 50 per cent farming loans are no longer the flavour of the month. There is no God- given (or Mark Twain-given) law to decree that the same could not happen to the va- lue of our houses. Furthermore, as the Bank discreetly puts it, 'there is likely to have been some leakage of funds from the housing market, through equity extrac- tion.' In other words we may have borro- wed for our houses, but we may have spent on imported cars or exported holidays. We may indeed: hence those awful August trade returns.
The second snag is, as the Governor also reminded us, that commitments entered in- to with those eager lending institutions with interest rates at 10 per cent may look rather different with interest rates at 12 per cent or more. The trend of mortgage in- terest arrears, the house repossessions, al- though admittedly still low, has been ris- ing. If the cost of money had gone up this week, that trend might have begun to acce- lerate. So we — or rather the banks and building societies — are in a Catch-22 si- tuation. The hectic pace of lending, both to personal and corporate borrowers, when looked at in conjunction with the growth of hire purchase commitments and consumer spending (not to mention the wayward per- formance of the broad monetary indica- tors), suggests that there are more than sufficient domestic reasons for tightening up on credit if we don't want to have an inflationary surge next year, in the run-up to the election. Yet higher interest rates are liable to put a question mark over the prudence of some part, at least, of the loan books which the banks and building socie- ties have been expanding so aggressively.
That is their problem. The Chancellor's problem is that whether or not he has contrived to block a rise in money rates this week it is not easy to see a resumption of the ever-popular trend to cheaper mort- gages this side of the next election. Indeed if a real cost of borrowed money (i.e. after allowing for inflation and tax relief where applicable) nudging five per cent has not sufficed to abate the chase for credit or to put some stuffing in the pound, one is bound to wonder what level of interest rates will suffice to do the trick. A cut in German lending rates might take some of the pressure off sterling: but that remains hypothetical, at best (and there is a reveal- ing little table in the Bank of England Quarterly which shows that the real rate of interest in Germany is only marginally lower than ours has been). It is thus diffi- cult to resist the conclusion that something more may be required if the Government wants to soldier on into 1987 — let alone 1988 — without storms disturbing the elec- toral climate. What price reintroduction of hire purchase restrictions (a temporary sus- pension of mortgage interest relief being beyond the pale of practical politics)?
Mr Lawson has now repeated his prefe- rence for postponing the election until 1988, this time to the Institute of Directors. `Sometimes governors decide to go early because they are afraid the economy is going to get into difficulties . . ." Not this time: 'I don't see that at all.' Let's hope he's right.
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