The economic facts of life
Nicholas Davenport
-To carry on with the present rate of wage increases," said Mr Len
Murray at the TUC General Council, "is plain draft. Working people are getting into a paper chase and they want out." This mark of a return to sanity, I thought, is worth 5 points on the FT index. Alas! the six guiding principles which the General Council produced as their short-term economic plan for fighting the inflation were also "plain daft." And that — together with the sterling crisis — knocked 10 points off the FT index, which has now fallen to 300 — 65 points below its Referendum top. • The daftest of the TUC six principles was "the radical action taken to limit price increases (maybe, but not necessarily, including a price freeze), which entails a more rigid application of the Price Code." This would, of course, inhibit any more company investment, for what industrialist or trader would want to sink money investing in more plant when he cannot make enough profit on the present application of price control to pay for the higher pay costs still "in the pipeline"?
It was also daft of the TUC to set as their 1976 objective the ho/ving of the level of unemployment which is now forecast as 1 million by the end of the year. Seeing that the world is in a deep trade recession we shall be lucky if we see world trade reviving by the second half of 1976. We have suffered less unemployment than Germany and the US because we have maintained demand through food subsidies and excessive wage settle" ments. We cannot therefore correct our inflation without temporarily increasing unemployment but it is obvious that the TUC have not yet learned that simple economic les. son.
It used to be said that politics becomes dangerous when power corrupts the politician but when power is held by incorrupt trade unions who are economically uneducated and financially illiterate the political situation can be even more dangerous. The danger, in fact, is that the uneducated but honest TUC will call in some clever academic economist to advise who is a revolutionary Marxist bent on destroying our mixed economy and the fabric of our democratic society. Why does it not call in the Bank of England to advise? At least their economists are honest, if a trifle stuffy and unimaginative. 1 have on my table the latest Bank of England Bulletin (printed in Brussels!) giving facts of our economic and financial life which the honest trade union leaders should try to learn'. Last year we suffered that ghastly deficit on our trading account of £3,850 million — thanks mainly to the quadrupling of the price of oil. In the first quarter of 1975 we did much better. We reduced the trading deficit to £340 million. The volume of imports fell by 51/2 per cent and the volume of exports rose by 7.3 per cent. Allowing for capital movements the deficit we had to finance in the first quarter was £600 million, which we did without trouble by borrowing abroad for the public sector, by drawing on the remnants of our $2,500 million Euro-dollar loan and by attracting foreign deposits. But mark the Bank's figures! At the end of March the oil exporting countries held £3,400 million out of the £4,900 million of the official sterling holdings and £300 million out of the £2,500 million of private sterling holdings. This means that if the oil producers lost confidence in British banking they could destroy the exchange value of sterling by withdrawing their deposits. The Arab governments and the government of Nigeria are therefore keenly interested observers of Labour politics and the TUC.
During the first quarter the sterling exchange kept fairly steady around a 211/2 per cent depreciation against the Smithsonian settlement of 1971.1n April it began to weaken; in May it began to sink; in June it has dropped to the 27 per cent depreciation level. The Bank has had to intervene — and last week bought sterling in its own name — but it cannot use up much more of its official reserves which fell $641 million in May to $6,491 million. (This is less than our total public sector borrowings abroad.) The Governor of the Bank made a despairing cry last week for "some form of effective restraint over pay and prices" but seems out of touch with Mr Wilson's strategy or that of Mr Healey. Mr Wilson has hailed the TUC plan as -a great step forward." So it is from his point of view — as the doctor in charge of the national asylum. When one of the patients has been walking backwards as a mode of progression it is encouraging to see him at last taking a step forward in the normal direction.
As for Mr Healey's strategy he has already warned the TUC that unless they can agree upon a reasonable "restraint" policy he will have to proceed further with cuts in government expenditure. The Bank Bulletin has some useful figures for the TUC to study. In 1974/75 public expenditure rose by about 30 per cent, most of the rise being due to higher wages and salaries. As a result the proportion of public expenditure to the gross national product rose to nearly 55 per cent and on present spending programmes will rise to 56 per cent. It is a scandal that when the nation is paying itself more than it is actually earning the public sector is actually leading the way to national bankruptcy.
The swelling increase in public expenditure is financed by more borrowing and more taxation. Mr Healey had estimated in his April budget that the borrowing requirement, which had risen to £7,600 million in 1974/75, would jump to over £9,000 million. In spite of cuts of £1,000 million which he said he was making it now seems that the borrowing requirement has topped the £10,000 million mark of extravaganza. This is how the Government prints the money to finance the inflation brought about by excessive rises in wages and salaries.
The Chancellor should be grateful to the City for coming to his rescue. It the government paper which he has had to issue had been taken up by the banks the leap in
the money supply would have boosted the inflation but the rise in M3 has been kept within the reasonable annual rate of around 10 per cent because the non-banking public has subscribed handsomely to the short-dated bonds the Treasury has offered. In the March quarter the Bank Bulletin states that an unprecedented net amount of £1,820 million of -shorts" was taken up by the non-banking public. Net official sales of stock for the 1974/75 financial year amounted to no less than £2,175 million. Of course, the investor responded to the spur of a fall in short-term interest rates which should be a lesson to the Chancellor. Let him not dare to raise -Bank rate" to defend the £. This would kill domestic investment and prolong the slump. Let him introduce the -two tier" system of interest rates — with the higher rate reserved for foreign holders of sterling, especially the oil producers.
There are other lessons which the TUC leaders might learn from this Bank -Bulletin but 1 quote the most important of them as they cling to their -full employment" dream. Page 138: "The problem is not that finance cannot be raised from financial institutions for profitable projects but rather that after years of decline the level of profits does not provide an adequate return on existing capital, nor make new investment attractive." The first sign that the TUC has appreciated that point will be the signal for investors to buy the FT index, especially if it falls below 300.
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