THE ECONOMY
A holiday season test for Mr Lawson's nerve
JOCK BRUCE-GARDYNE
August is, according to Miss Edna O'Brien, a wicked month. For us Brits it is. No sooner do we pack our bags for Skeggie or St Mawes than the heavens open, and the balance of payments goes haywire. As I headed north for my annual pilgrimage to the River Spey (where at least one usually has the consolation that if the weather is bad, the fishing will be good — only this year even that didn't work) I passed some large consignments of imported BMWs heading south. The thought occurred to me that Mr Lawson might suffer an interrup- tion to his hols when the July trade returns materialised. 6.
So, indeed, it proved. The current account deficit may have 'arisen from private sector behaviour', as the Chancel- lor told the Institute of Economic Affairs dismissively in July. Nevertheless £2.15 billion in the red in a single month was `very unwelcome', to put it mildly. So unwelcome was it that a number of those Tory MPs who are always awaiting photo- calls even at the height of the holiday season had already forgotten their vocifer- ous defence of the Chancellor against Imagined threats from the Prime Minister at her end-of-term meeting with her backbenchers only weeks before. Messrs Phillips and Drew surely went over the top with their latest predictions about Mr Cecil Parkinson stepping in to rush through an autumn budget, reversing all the spring- time budget cuts, over Mr Lawson's body. All the same, the glad confidence of the Chancellor's high summer has faded amidst the thunder and lightning of the August storms.
So sterling is 'in play', and the 'teenage scribblers' are enjoying themselves at the Chancellor's expense. Hell hath no fury like a City hack who reckons he has one of his own breed, promoted into the big time, on the run. Those whose morality was outraged by the Budget 'hand-outs to the rich', and who found to their dismay that on the whole the nation did not share their outrage, are now getting their own back. They yearn for that autumn package, so reminiscent of the good old days of Denis Healey. Cut our Nigel down to size, that would.
Happily for all of us he takes some cutting. When over-lending has been the obvious culprit, a reversal of the reductions in income tax, or — odder still — a tax on employment, as suggested by the National Institute's call for an increase in the em- ployers' stamp, would be plain perverse. There is much talk about the 'bluntness' of the interest rate weapon, and its likely impact on manufacturing investment. But now that the profitability of our manufac- turers has recovered — for the first time in more than 20 years — to internationally competitive levels, and their problems are those of coping with demand instead of those of surplus capacity, it is going to take a great deal more than 12 per cent base rates to choke off their investment plans. Admittedly when the CBI complains about the cost of borrowed money it usually has in mind the resulting support for the exchange rate, which makes it more diffi- cult for the membership to pass on cost increases to its customers. But under pre- sent circumstances the pound needs all the support that it can get.
In other words the credit weapon, far from being blunt, looks surgically precise. It raises the cost of servicing loans to the private housing and commercial property markets, where all the action has been, and hence in due course gives the more margin- al venturers pause. And presumably it makes all those savings schemes which are targeted every weekend at the wrinkly market more alluring. Judging by the cries of protest I used to receive, as a constituen- cy MP, from my fellow wrinklies when the Department of National Savings, the build- ing societies and the banks shaved their rates, there are an awful lot of interest- rate-sensitive senior citizens out there eager to be wooed by a better return. In other words 12 per cent should be the medicine required to tilt the balance from borrowing to saving.
But it takes time. It was, as I recall, the late Lord Beeching of railways fame who likened economic management to the steering of a super-tanker. For my part I look back to my days of military service, and the terrors of commanding an armoured car which could travel as fast backwards as forwards. You told the driver — who was facing backwards — to turn left, and you watched the tree ahead approaching with alarming speed. You were liable to command a panic stop as the armoured car seemed to be so slow to respond to the call for a change of direc- tion. Fortunately — once again — from my experience Mr Lawson is never happier than when driving dangerously. He told us in the spring that the 3.15 deutschmarks being collected for our pound was 'unsustainable'. Very true. His mistake was to try and prove this point by slashing interest rates, and ordering the Governor, Robin Leigh Pemberton to press pounds into the hands of every passing foreigner. Sterling continued to be offensively sustainable, and there was an ugly row with the neighbour over the wall in Downing Street.
Now he faces a test of nerve in the opposite direction. He has applied the thumbscrews to us private borrowers. And the Bank of England has accumulated $50 billion beneath its belt. If it has to use some of this fighting chest to help steady interna- tional nerves over what are likely to be fairly ugly monthly payments figures in the autumn, Professor Walters should, one hopes, be on hand to remind the Prime Minister that sales of foreign currencies from our reserves will show a sterling profit, and tighten domestic monetary poli- cy, just as the purchases in the spring, about which he was so disapproving, did the reverse.
With the economy still in overdrive Mr Lawson is going to have to look out for the traffic cops. His statement that 'interest rates will stay at 12 per cent for some time' expressed an ambition, one hopes, rather than a commitment. If the trade figures continue to scare the horses, he might yet have to push up the cost of borrowed money further. For he cannot afford to have us importing further inflation through a tumbling exchange rate. But in domestic terms he has done what was called for. And maybe he has learned a salutary lesson in the process.
France's Socialist finance minister, M. Beregovoy, was off to Bonn this week to lecture the German Central Bank gov- ernor, Herr Pohl, about the irresponsibility of his monetary stance. Herr Pohl's duty was to cut German interest rates and 'produce a bit more growth'. Herr Pohl's answer, by all accounts, was that such behaviour would only lead to cheaper deutschmarks and thus to still larger Ger- man export surpluses. No democratically- elected government can affort to turn its back on the foreign value of its currency. But if that becomes the lodestar of its economic management it is liable to give itself the miseries, and to be a nuisance to its trading partners in the process.
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