/ lotion: the perils 1 „the Prime Minister
Wood
141111(4 quite two years in office to show Ntet. earl do, Mr Heath has a sporting beco— e .,1 the first Prime Minister laet within striking (or should it be 6 ) With. distance of doubling the level of rn 111 a single administration. t F:,taY well not be what he intended he Was once reported to have '.d. to stop prices rising at all, and, te.,11.inted, pretty sharpish, too — and. he less not what people want retss: it is happening, and at the °Cc, Inflation will nearly halve the niclIneY in not much more than five huh already moving towards a world arid °1 loaf of bread will cost at least lbestea,k £2 per pound. The family uses r -n sale at not less than £1,00 , .,0 ; wailab 'n the West End of London will lati le from £45,000 (though a cheap 115,1,e country might go for as little 1 u). At least it will solve the , putatereated by decimalisation, of the tbe IP and 1p — the coins just .4 fot, needed. There isn't much you can old-fashioned shilling as it is. w,.,, Io "uer the unions, in trying to reach tri decisive increase in the real dell:f living of their members, are * as1.1Iding wage increases almost as 13 a A 'c'tal Wage packets were a few g„,-. In some industries the talk is of 'or t7,111 Weekly wage of DIO. 41iine rest of us — that is the latiosned Majority of the working kir --the outlook seems almost ikellable , and to make it worse the eg t'T of the Exchequer has recently 'itibil 'le old and ominous theme that etrii! not a problem for the alone, but that everyone I,' arid,' etc, including unions, businessis a ---er, shopkeepers and so on. Iret• vs Plain a cry of "abandon ship” cia'eu could wish not to hear. One of therYs the Chancellor who explains I iiltie„i,s really not much he can do elicp,'"on will suffer the traumatic stoo-ri of being listened to, and and then it won't just be the t4s,Wte Won't need, though a £1 should Your bus fare. to"therities
M rely
'‘id pi by the public. But imagine what 'et th")rleY in to National Savings tot on the surprisingly strong jevival of sales of government already have increasapPen if savers were to say, "Enough of keeping our money where the annual rate of interest is less than the rise in prices. Let us spend it instead on a house/car/domestic appliance/holiday, before it becomes still more expensive.' Treasury Ministers seem oblivious of the potential threat from the £10,000 million in National Savings which overhangs the administration like a snow cliff before an avalanche.
Any attempt to evade or minimise government responsibility for inflation simply plays into the hands of those who, for whatever reason, want a prices-andincomes-policy,' which the Conservative administration must oppose, and indeed used to oppose. It doesn't matter how many distinguished people join in this ancient and primitive ritual dance or however much ' weight ' their names may carry, a prices-and-incomes-policy ' will always remain an escape into fantasy, an attempt to buy off a hard problem with a soft option. The appeal of the argument is not so much to economics as to history. It is now just thirty years since Britain first began to try to substitute government control for the market relationship between prices and wages. However much the terminology has varied — we have had a National Wages Policy, Wage Norms, Freezes, Guiding Lines, Restraint — the result has always been the same — failure. Either this Government is prepared to enforce, with direction of labour and legal penalties, a prices-and-incomes-policy ' which will clearly be seen to be stopping some people doing or getting what they would otherwise have done or got, or it is wasting its time. Of course the attraction which keeps a prices-and-incomes-policy ' alive is that it opens the way to a completely controlled economy. Statutory price control and wage fixing, if effective, give governments a comprehensive command over economic life. It is not, one would have thought, a prospect that should appeal to a Tory administration.
But nor can the prospect of three more years of sharply rising prices. All of which seems to leave the Government in a position as perilous as Pauline's. At least Pauline could rely on the hero turning up, delayed perhaps, but always before the end of the film. It seems unlikely that any hero economist-politician can now bring off a successful rescue of the Government from its own economic policy before the next election. Most observers indeed will find it difficult to avoid the temptation simply to tell the Government that it should never have got itself into such a scrape in the first place.
It was always clear that the Government made a mistake in putting taxation reform before expenditure reform. However much the tax system needed overhauling, at least as much attention should have been paid to the other side of the Government's accounts. The argument is simple enough. Government spending continues to count for a larger proportion of national income every year, and no policies (such as moderate charges for some welfare services) have yet been introduced which will reverse this process. But taxation will have been cut by about one sixth by the measures of the last two years. The inevitable result is an enormous increase in the Government's need to borrow and this in turn is one reason for the massive increase in money supply.
But the government printing presses have also had to print notes for another reason. In order to pay for the inflow of foreign currency produced by our balance of payments surplus we have had to make sterling available to buy dollars. The scale of the payments surplus, at about £1,000 million in each of the last two years is, of course, without precedent. And although some of the inflow of funds from abroad has been put into medium or long dated government securities, much has gone into bank deposits and Treasury Bills.
So it was a mistake not to prolong indefinitely the period of floating which the £ enjoyed last autumn. By rejoining the fixed exchange rate club, we again put ourselves at risk to upsets from the backwash of the American economy. And over there the prestigious Brookings Institute has just prophesied that America may continue to be in trouble until 1977, so a further outflow of American dollars seems quite likely. If British policy insists on taking the strain of a renewed inflow of such funds on the reserves and not on the rate, further pressure on the money supply is inevitable.
Both domestically and internationally there are strong pressures threatening still further growth in the money stock. As it is, the money stock, having grown at an annual rate of 13 per cent in 1971, has raced ahead at an annual rate of 21 per cent in the first quarter of this year. You may think we have had enough inflation, but there is plenty more to come.
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