Spectator " 0 2 197 M 5 ICS
AND THE CITY
The Tuesday drama
Nicholas Davenport
Mr Healey's hastily prepared antiinflation statement on July 1 — the extreme haste was due to his anxiety to reassure the nervous foreign holders of sterling who were unloading in the exchange markets — caused quite a flurry on the Stock Exchange. The bears rushed to cover and some real investors rushed to buy. The rise in the FT index was a phenomenal 23.7 points — the biggest ever leap in a p.m. session. I happened to say last week that the first sign of a return to sanity in the British scene would be a signal for investors to buy, especially if the index fell below 300. It had, indeed, dropped to 291.8 and it has now recovered about a third of the ground lost since the Referendum peak.
Any step, however feeble, towards economic sanity is to be welcomed and although Mr Healey's statement that "we are determined to bring the rate of domestic inflation down to 10 per cent by the end of the next pay round (October 1976?) and to single figures by the end of 1976" raised hollow laughs among the cynics it was heard with some relief by the City fathers who were impressed by the fact that the Government was at last determined to do something — that is, to limit the increase in wages and salaries and dividends to 10 per cent m "the next pay round." The dividend limitation (the allowable increase being cut from 121/2 per cent to 10 per cent) will operate immediately — it is always easy to make the capitalist toe the line — but the other limitations will need a battery of measures" which will be disclosed in the White Paper shortly to be published. Meanwhile Mr Healey has given an assurance to Mr Len Murray of the TUC that the Government does not intend ever to introduce a statutory control of Wages.
As a politician Mr Healey has Probably gone as far as he could reasonably expect the TUC to follow. Reassuring noises have, in fact, come from Mr Jack Jones and his TWGU and from Mr Len Murray. But the militant and Commun!st-led unions will, of course, attack rum, being opposed to any form of wage restraint or interference with collective bargaining, and the Tribune. group of members will fight him in the House. It is significant that the latter have already voted against and caused the defeat of the Government on two amendments
to the Industry Bill. If this opposition is strong enough to force Mr Wilson in the end to ask the Queen for a dissolution the Stock Exchange will once more be faced with a long period of uncertainty and peril. So, while the bull market has not ended, we are back in what is called "trading markets" for the time being.
In the "battery of measures" to be announced in the White Paper is the innovation of "cash limits for wage bills in the public sector so that all concerned may understand that the Government is not prepared to foot the bill for excessive settlements through subsidies or borrowing or by loading excess costs on the public through increases in prices and charges." Mr Healey said that he proposed to employ the system of "cash limits" more generally as a means of controlling public expenditure in the short term. This innovation, 1 believe, was devised by Mr Crosland, the Minister of the Environment, who has lately been lecturing the Railway Board and the local authorities on the need to curb their spending on these lines. When it is realised that its application will mean cutting public services and therefore creating more redundancies and unemployment there will probably be an unholy row at the TUC.
It is not yet clear whether the new "cash limits for public wage bills" will apply in the current financial year or in 1976/77. Mr Healey has committed himself to a further cut of £1,000 million in public spending in real terms in 1976/77 but as the official estimate of the borrowing requirement is still around the £10,000 million level it looks as if Mr Healey intends to make immediate use of the new innovation. The success of its application remains extremely doubtful but Mr Healey's determination is shown by the concluding words of his statement: "If no voluntary agreement can be reached . . . the Government will be obliged to legislate to impose a legal requirement on both public and private employers to comply with the 10 per cent limit."
While Mr Healey's hasty — and one-sided — plan to curb the inflation may be the only political way to coax a stubborn, sullen and suspicious TUC into some form of wage restraint it is not regarded by the business world as the correct procedure to get a very depressed economy working towards recovery in a non-inflationary way. Industrial profits have been steadily reduced by price control and inflation so that in real terms they are now insufficient to finance new investment at current prices. Since the recovery on the Stock Exchange many companies have been able to make 'rights issues' of new capital — up to a total of around £800 million — and about £1,000 million of industrial loans have been approved by the newly enlarged FFI (Finance for Industry). So far, so good, but this is a mere drop in the bucket of new industrial investment. What the private sector needs is more profitability, The Chancellor has admitted that the Price Code has been bearing heavily on many firms and would have to be used even more harshly on those who make pay settlements in excess of 10 per cent. Prices, he said, would have to come down in line with costs. This disregard of profitability is typical of the new doctrinaire socialism. If the unions would abandon their old restrictive habits — their insistence on over-manning when a new machine cuts down labour-handling — and acquire an interest in raising productivity and profits, in which they could share through participation in a public unit trust, they could even be allowed to have their free collective bargaining.
Whether Mr Healey's anti-inflation plan will impress the foreign holders of sterling and halt their nervous selling in the exchange markets remains to be seen. If it does not the Government will be forced — in view of the inadequacy of its falling reserves — to apply tc the IMF for a loan of $5,000 millior and write a letter of good intent affirming their desire to drop their crack-pot socialism and proceed with a sound anti-inflation programme. By crack-pot socialism I mean the printing of more government paper to finance the takeover of sound or unsound private enterprise. The already swollen public sector, with its bursting wage and salary bill, is the main cause of our present inflationary
mess. . .
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