MONEY Being beastly to Barber
NICHOLAS DAVENPORT
The reception given to Mr Barber's mini- budget—from the press to the pub, from the Bank of England to the Stock Exchange— has been unfair, ungenerous, mean, crabbed, and, in short, skinflint. (Forgive me, that word is now taboo: to use the word now current in diplomacy I would say, in short, 'george-brownish'.) A gift horse is often looked at in the mouth but this one has been thrashed, kicked and made to look thor- oughly measly. Only the Economist and the SPECTATOR have had a kind word to say in financial criticism. From the left have come shouts of `barberism'—a poor joke which I would ask Mr Barber to kill at once by pro- claiming that all students and pensioners will be admitted to museums and galleries free. From the right—especially the right in the City—there have been the disappointed cries: He has done nothing to stop the wage infla- tion'. But who in his senses would expect a Chancellor in his first attempt to cut enough government expenditure to make room for a modest reduction in direct taxation, which he has done, to go out of his way to apply 11 more fiscal restraints on economic growth? That was not the object of his recent exercise and in any case it would have been unjusti- fied. The need to push growth is paramount.
The Stock Exchange is a poor judge of politico-economics but the Bank of England ought to know better. It was really unforgiv- able of the Govern3r to tell Mr Barber at the Mansion House feast three weeks ago that he could not' possibly fight the wage inflation without an incomes. policy. That might be true but, as everyone knows, it is for the moment politically impossible. I asked at the time—here in this column—why the Governor had not done what was prac- ticable, namely, call upon the joint stock banks for more 'special deposits' if he was worried about inflation. Now he has had to do just that—calling for £100 million more— but it has been made to appear that Mr Barber had been weak not to have done it before.
In point of fact the call for more 'special deposits' at the Bank—raising them from 2+ per cent to 31 per cent and making the total £360 million—is of no great importance. The joint stock banks have been enjoying excess liquidity for some time—their liquid- ity ratio being 32 per cent against the mini- mum requirement of 28 per cent—and as they have allowed their advances to increase by 41 per cent in the past six months it was only natural to cut down their liquidity and give them another warning that their ad- vances must not go much further. They have nO need to sell gilt-edged stocks to comply With the Bank's call. Yet the `spivvy' element In the gilt-edged market foolishly took fright and unloaded stock to the extent, it was said, of £200 million or more. The long-dated stocks dropped by 2 points in the week. Now the Friedmanites are attacking Mr Barber because, they say, he should not have allowed the Government broker to take some 900 million stock off the market and so I.ncrease the money supply. But they are talk- !oft nonsense. The primary object of support- ing the gilt-edged market is to encourage
companies to come to the capital market and fund their bank advances, thus reducing the money supply. They will not fund while the gilt-edged market is falling and making it more difficult for them to borrow. This year company issues on the capital market are down by nearly 50 per cent because com- panies have found it too expensive to borrow. That largely explains the rise in bank ad- vances—short-term finance being much cheaper—and the rise in the money supply. So it is correct monetary policy to support the gilt-edged market, bring down the borrowing rate and encourage companies to fund and finance their investment on the capital market. I hope Mr Barber will not be diverted from this sensible policy by the ill- considered cries of Friedmanites who do not understand the market situation. At the moment government stocks are due for a recovery. Interest rates have been falling on the Continent and in the United States—a cut in the American discount rate is presently expected—and money has been coming to London because our rates are relatively high. Now is the time to support the gilt-edged market and get the investment machinery of the City working for economic growth.
In the equity share markets the reception accorded to Mr Barber was the beastliest of all. The Stock Exchange did not seem to appreciate that the Chancellor had improved company liquidity. The cut of 2+ per cent in corporation tax, effective in January, is an immediate help to companies which had already made provision for tax at the old rate of 45 per cent. Nor did it seem to care that Mr Barber had encouraged investment in the service industries which had been shabbily treated by Labour's system of in- vestment grants. According to the Economist the depreciation allowances bring for British companies as a whole an improvement in cash flow of £60 million in the next six months and £90 million in the year to April 1972. (Thereafter they might be slightly worse off.) In the development areas there is a return to free depreciation for all industrial plant excluding buildings and vehicles. Free depreciation also applies to shipbuilding but this will not help companies which are not making the profits against which deprecia- tion can be allowed.
It is surely something that the Govern- ment's new policy for industrial investment puts the emphasis on profitability. Labour's policy of investment grants committed us to spend this financial year no less than £520 million regardless of whether the grants went to non-profit-worthy companies. In addition £113 million was to be spent on regionai employment premiums and £23 million on providing technological services to companies regardless of their merits. Surely the Stock Exchange should have welcomed this return to greater sanity and economy in the govern- ment largesse for industry. But it turned a surly face to Mr Barber's reforms. Even the shares of companies in the service industries which are now to have decent treatment went down with the rest. The net result of im- proving company liquidity by 2f per cent, which is tantamount to improving companies' earnings yields net of tax, was a fall of II points in the FT index in the week. It does not make Stock Exchange sense.
Perhaps the surliness of the Stock Ex- change response can be traced to the fact that Mr Barber has abolished the subsidy on the railway commuted services into London which are used by City workers. But should we expect him to stand up against extrava- gant wage claims (which is the only way to kill a wage explosion) and be lenient to City commuters? The whole idea of the Tory revolution is to change the style of the nation at work and make it more honest and real- istic. Perhaps the Stock Exchange cannot stand too much truth.
ffolkes's investors' alphabet
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