The Budget: Right view
Clever snake in narrow tunnel
Nicholas Ridley
One cannot but admire Mr Barber's energy, his ability, and his political flair. During a week of hectic discussions on the International Monetary crisis he has managed to produce a Budget which was attractively presented and full of ingenious ideas.
In particular we can be grateful that he has been wise enough to stop at the " land-hoarding " tax, and to eschew taking measures that would have tended to dry up the supply of land. His action to increase the Government's take from North Sea Oil is timely and necessary. Whether one welcomes the exemption from VAT for chips, sweets and ice cream, children shoes and clothes, depends 111)0n one's personal taste: personally, I would have preferred the money to be used to increase family allowances. I am also sad that there was no concession for the private company that does not distribute much of its profits under the new Corporation Tax system — a most deserving case.
But these are the minutiae of the Budget. What matters is the central economic judgment that lies behind it. Mr Barber claimed that it was "broadly neutral" — by which he means that there were no major changes in the amount taken by taxation. But in fact the borrowing requirement is expected to go up from £2,855m in 1972/73, to £4,423m this year, after the Budget changes.
The Chancellor explained that last year's borrowing requirement was met by £1,200m of borrowing from the non-bank public, by £1,600m from sterling which the authorities received when the international hot money flowed out of London during the June 1972 currency crisis, and by bank finance in the last four months. It is presumably the latter two which have been responsible for the steep increase in the money supply averaging about 25 percent during 1972.
But how is he going to finance the £4,423m deficit this coming year? He told us that £800m of this is temporary, on account of the new imputation system for Corporation Tax, But, whether temporary or not, it will still have to be found from somewhere if excessive recourse to bank finance is to be avoided. This is why the Chancellor has invented many attractive bribes to investors. The new gilt edged shares, the raised limits on National Savings, the souped-up Premium Bonds are also designed to this end. There are two difficulties about this policy. Most of the funds he gets will be sustained out of building societies' equities and other assets, with awkward consequences for them. Transfers from one savings medium to another may not in fact represent a reduction in the money stock. Secondly he will be increasing even higher public expenditure on paying the interest on his borrowings — he is budgeting to spend £1,975m on interest this year.
The real joker in the pack is the hot money. If we have to fix the pound in order to participate in the celebrated "joint float ", the hot money will be off like a scalded cat.
No wonder the Government are asking the Europeans to support the pound without limit as the price for fixing. If the hot money flits the Germans and the French would have to replace it with marks and francs which will be worth more than their face value. Otherwise the pound will go on floating. The Government has been clever on this one: either way, contained float or European-assisted peg, they ought to be able to retain their foreign borrowings.
The implications for money supply are formidable. It seems impossible tO get through this year without further , large increases, adding always to the pressure of inflation. Indeed many people expect another budget during 1973. This was clearly the reason for Mr Barber's claiming that he was doing some contingency planning for reducing government expenditure. So he showed: the £200m he has lopped off expenditure this time is totally inadequate.
Mr Barber is a very clever snake, but he is in a very narrow tunnel. The Government's declaration that their count er inflation policy is " fair." make it exceptionally difficult for them. to increase taxation, because it would immediately have made things " unfair " for all sorts of groups in society. On the other hand to reduce government expenditure could also have upset the balance of " fairness "; and government spending is notoriously easier to turn on than off. What should be done now is to jump on all new spending sprees, and to look carefully at some existing ones to see if they can be tapered off — I would list the £500m annual subsidy to the nationalised industries, Maplin, computers, aeroplanes, and some of Mr Peter Walker's activities at the DTI, as likely candidates for contingency planning. , If taxation cannot be increased, and expenditure cannot be cut there is no hope for counter inflation, because the rising tide of money will swamp Phase II before the ink on the wretched " Code " is dry. Indeed counter inflation could actually be counter productive if it presents the Government getting their accounts more nearly into balance. This Budget has been conditioned 'by the tunnel of counter inflation, which is why I suspect that before long "Other measures will be laid before you."
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