CHANCE OF A LIFETIME
1957 was a year of stagnation, and 1958 will be a year
of recession. That is the picture of the economy laboriously built up by many pundits during the last few months. The duty of the new Chancellor of the Exchequer, in his Budget next week, has therefore been made plain to him—he must prod the flagging economy into new life. Indeed, the Government has been criticised for not doing this already. So, just as, for the first time in more than three years, the authorities ' are beginning to regain control over economic developments, and to have some margin of manoeuvre in their economic policy, just as the position of sterling begins to look more assured, but before it is abso- lutely certain that Britain has turned its back on rising prices, a substantial body of 'informed' opinion is crying out for a further dose of inflation.
But last week the Government hung up its picture of the economy. In this year's Treasury triptych—the Economic Survey, and the official papers on the balance of payments and the national income—the colours are not so low-toned. It will come as a surprise to readers of some newspapers that in 1957 Britain produced more, consumed more, saved more, invested more and exported more than ever before. These records were achieved in spite of the dislocation after Suez and the severe exchange crisis last September. It hardly looks like stagnation. The first three months of 1958 have brought fresh evidence that there is a great deal of forward drive still in industry. It simply is not true that production, investment and profits are all declining. In some cases there may be a squeeze on profit margins (surely to be welcomed?), but elsewhere many companies are enjoying quite a different ex- perience.
Again, a few companies have now completed the plans for modernisation drawn up some years ago. But many more— AEI, ICI and Ford, to name a few—are still pushing ahead with big programmes for capital expenditure. All in all, in- vestment in industry this year is expected to be at least as 'great as it was last year. The idea, now so popular amongst some academic writers and journalists, that there is surplus capacity in, industry, would be more convincing if specific cases of idle factories had been reported in the newspapers, and if unemployment were not still below 2 per cent. Abroad, our performance this year has been remarkable. The gold and dollar reserves have recovered nearly $500 million in the last three months, and are now at their highest level since early 1955. In February, we came close to paying for our imports by our exports; that is, we nearly closed the trade. `gap' without using our income from foreign investments and other 'invisible exporte-2-an achievement without precedent.
The truth is that when Mr. Heathcoat Amory introduces his Budget he will be speaking against a background of high prosperity, not general decline.
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The advice now being offered to him can be summed up in the phrase 'If no inflation, then slump.' But it is inaccurate and irrelevant advice. To try to stimulate the economy by adding to the public's spending power would be a mistake. This does not mean that particular and limited concessions are necessarily ruled out. There may be a case for helping the film industry, and there is always a case for reform of the purchase tax. But as the Prime Minister reminded us last June, since the end of the war we have produced 30 per cent. more goods, and paid ourselves 90 per .cent. more money for them, and there is little sign yet, that the unions have stopped asking for higher wages. Moreover, the Chancellor faces an overall- deficit of about £300 million in his Budget for next year as it is. This offers no scope for concessions, and the Chancellor will_do well to leave the home market alone.
It is on the international scene that the Chancellor should concentrate. As the Economic Survey points out, 'there will be a hard struggle to increase and perhaps even to maintain exports.' Here is the problem which more than any other should now be the obsession of the authorities. Because of the American recession and the fall in prices of many com- modities, some of-our foreign customers may find it more difficult to pay for our exports. It is purchasing power over- seas, not at home, which is disturbing at the moment. And it is this which should determine the shape 'of the Budget. The aims of policy for 1958 must be first to sustain the, export trade, and second, to push ahead with the repayment of Britain's sterling liabilities. These aims are complementary.
In the last six months of 1957 the sterling countries spent £220 million from their reserves in London to. supplement, their falling incomes. This is just what these reserves are for, though in the past the timing of withdrawals has frequently been embarrassing to us. Now, however, wherever possible countries should be encouraged to use their sterling balances. Many of the Colonies, for instance, have been saving rather than spending for many years. Ghana and Malaya, too, are said to have plans ready for further industrialisation.(Now is their chance to push ahead with development, financed by running down,their London balances. As the Survey points out, 'Sterling is strengthened by such a reduction of liabilities as well as by an increase in reserves.'
These countries will also spend most of their balances in Britain, thus keeping the factories here busy, unless, of course, British prices become too expensive. And this brings us to 'the other aim of policy. The best thing that Mr.
Heathcoat Amory can do to improve the com- petitiveness of British exports is to revise the profits tax. In its present form this tax penalises efficiency, deadens the willingness to take risks, and hinders the proper working of the capital market. To substitute a flat-rate tax for the present one which discriminates against profits paid out to shareholders would at least lessen the short- comings of what will always remain a bad tax.
The Chancellor will therefore be wise to main- tain activity at home by paying off our debts to other countries, as we are already doing, rather than by putting more money into the pockets of the British public. A few more months along these lines would, however, lead to new problems. Next autumn, instead of wondering how to deal with the seventh major speculative attack on sterling since the end of the war, the 'Chancellor would have to worry about how to keep sterling from rising above -$2.82 in-the exchange markets, and at the next IMF meeting he would have to face complaints, from the world that sterling was a scarce currency, and that 'Britain should put an end to the sterling shortage, That would be the moment to cut Bank rate to 4 per cent. and to encourage greater investment overseas.
Such is the prize within the Chancellor's grasp, if he has courage enough to reach for it. Even if he finds the international arguments unim- pressive, he should find decisive the sentence in the Survey which says : 'There is thus a good opportunity in 1958 to stop the rise in prices which has troubled the country for twenty years.' What an opportunity that is!
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