EcaHom7 VNIE COTIT
Tougher Than You Think
. By NICHOLAS DAVENPORT
IMUST say at the beginning that Mr Callaghan gets wiser and more cunning with each budget —and he has had three. On this parliamentary occasion he was wise enough to avoid argument on economic theory. He simply said that his budget was intended to help achieve three objec- tives all at the same time—a strong a steadily growing industrial strength and full employment. The economic theorists of the Paish variety would say that these objectives are incompatible—all at the same time. Those of the Harrod-Shonfield- Davenport variety would argue that they are not incompatible provided the Chancellor (1) avoids the conventional measures of raising direct and indirect taxation, which have an inflationary effect- upon wages and salaries, and (2) is pre- pared to take some positive action in the actual direction of capital and labour.
This Mr Callaghan has broadly done and so I welcome his budget as economically sound and politically courageous—but with an important reservation. On the direction of capital the Chancellor is not making use of compulsory powers, but is asking companies to slow down their direct investment in the developed sterling area, submit their schemes to the Bank of Eng- land and finance approved projects from local sources overseas rather than from this country. (Australia and New Zealand, etc., have been consulted.) Investment outside the sterling area remains, of course, strictly controlled by. the Bank of England. On the labour side he is avoiding direction, but is introducing an extremely contro- versial 'selective employment tax' and relying on the 'compulsory early warning' Bill to enforce a prices and incomes policy. The selective employ- ment tax, falling upon the distributive and service trades, could raise the cost of living, if the tax is passed on, but only to the extent of 'well under 1 per cent' if the Chancellor's estimates are cor- rect. (It is equivalent to a purchase tax on services of between 3 per cent and 4 per cent.) All manu- facturers (not merely those who manufacture for export) will get a refund premium of 32s. 6d. a week per male employee against the tax of 25s. So the exporter, in a roundabout way, will in effect get a subsidy from the state without offending GATT. Mr Callaghan has, therefore been cunning as well as wise. But whether the new tax will work out as it is intended is an open question. It may encourage manufacturers who cater for the home trade to hoard and waste labour more than it actually helps manufacturers catering for the export trade to secure more labour. After all, only about 40 per cent of our total output of manufactures is exported. It might have been better to limit the refunds to that pro- portion of the labour output earmarked for export. No one wants to see labour from the service industries redeployed into making, say, mad 'fashion' garments which are unexportable except to the King's Road in Chelsea.
This 'selective employment tax' will yield £240 million in a full year and £315 million in this fiscal year because of the interval between the collection of the tax and the payment of premiums and refunds. With this and the betting tax' and with corporation tax at 40 per cent (as expected) the estimated surplus for 1966-67 is
raised from £661 million to £1,047 million and the 'borrowing requirement' reduced from £673 mil- lion to £287 million. No wonder the 'gnomes' of Zurich are pleased. The budget is far more de- flationary than they expected. People have been talking of a 'tough' budget and seem surprised to find that a Chancellor can be tough without rais- ing income tax or surtax or purchase tax or petrol tax or the vehicle licence duties. The Treasury have followed their old deflationary tactic of underestimating their revenues. They -estimated last year a surplus of £544 million and realised a surplus of £689 million. Now they are going for forced savings of £1,047 million which will in all probability again be exceeded. With such savage over-taxation where are the incentives for better management or men to'work extra hard?
The balance of paynients, I believe, has been strengthened by this budget. On the current trad- ing side I do not think that the removal of the 10 per cent import surcharge will have any material effect. It has long since ceased to be effective. In so far as the selective employment tax does redeploy labour from the service trades to manufacturing (which is, as I say, question- able) the export trade could benefit, but that must depend on the competitiveness of British manu- factures, that is, on our prices and wages policy. It is on the capital side that Mr. Callaghan is most likely to secure an improvement in the balance of payments. By pruning government expenditures abroad, by securing relief-from the foreign exchange cost of keeping our forces in Germany—negotiations with the Federal German government are about to begin—and by slowing down investment in the developed sterling area he hopes to secure a further saving on the capital account of up to £100 million. By adding on the continuing effects of last year's capital measures he will save up to f200 million which will be sufficient to eliminate last year's long-term capital deficit of £200 million.
Mr. Callaghan is looking for more disinvest- ment abroad—the 25 per cent grab of the dollar investment premium brought in £70 million in its first year of operation—and he is giving a lead by selling 1,243,824 shares of Amerada Petroleum from the Treasury's remaining pool of dollar securities. This will realise about £30 million. The proceeds have not yet been brought into the re- serves, but it will be recalled that £316 million of the government dollar pool had already been liquefied and taken into the reserves at the end of February which then stood at £1,303 million (now £1,257 million). Mr. Callaghan was, there- fore, justified M reproving those financial com- mentators who have been belittling our chances of repaying the IMF loans which total £900 million. The first tranche of $1,000 million, fall- ing due in November 1967, could be repaid tomorrow and the Chancellor remarked that he would, in effect, start the process of repayment ahead of time. No one, he added, should deduce from his present disinvestment policy that he rejoiced at the thought of cutting down our over- iseas investment. It-brought, he.said, a substantial long-term • benefit to the invisible account and when he had achieved his triple- objective he would'ease the restraints on the capital outflow.
But, he added: 'I will not create unemployment it home in order to allow capital from this country to pour out overseas. I am not willing to place further drastic restrictions on our home economy just for the purpose of achieving a Current surplus so large that it would finance an outflow of capital abroad of any size.' Even the gnomes of Zurich ought to appreciate a British Chancellor who can make a statement of this unequivocal sort. He is tougher than you think.
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