THE ECONOMY
If Mr Kinnock came into his kingdom
JOCK BRUCE-GARDYNE
'SEVEN-and-a-half cents,' as the striking garment workers in Pajama Game used to sing, 'doesn't seem a hell of a lot', and nor does a six per cent lead in the opinion polls at this stage in a Parliament. Nevertheless the City (and Whitehall too, no doubt) has begun to look seriously at the implications of a Labour government after the next election. Great gentlemen like Mr Hatters- ley are eagerly invited and (when they remember to turn up) handsomely wined and dined in City parlours. Economists in the backrooms of the leading stockbrokers run their slide rules over Labour's plans and public expenditure strategies. The columns of Hansard are closely studied for Policy commitments.
The outcome of these exercises is, it seems, deemed to be mildly reassuring. According to the City University Business School, what is known of Labour's prog- ramme to date would be calculated to cut the dole queues by a million in two years at the cost of an increase in inflation to a bearable 61/2 per cent per annum. A rival study is even more bullish, with output growth jumping to four per cent by the year after the election, and the purchasing power of incomes rising by five per cent by 1990. Almost enough to have the City voting Labour.
The basis for these cheerful calculations is not exactly obvious. That Mr Kinnock and his entourage are working overtime to display the acceptable face of socialism is beyond dispute. But it's all a little short on Your actual numbers. For, as shadow in- dustry secretary John Smith explained with engaging frankness the other day, 'we have not started the number-crunching yet'. He was 'cautious of writing down bits of money. They get added up by the Con- servatives'. As indeed, in this wicked world, they do. In fact, Chief Secretary John McGregor has already achieved some notoriety for his figure of £24 billion in extra public spending as the bill for Labour's 'firm pledges' (as Harold Wilson used to call them) — to the sputtering indignation of Mr Hattersley. So perhaps it may be more instructive to consider past performance than to study present promises. Incoming governments invariably complain that their first task is to clean up the mess' left by the other side: and there is usually something in it. The Labour government in 1964 did inherit a sharply deteriorating balance of payments situation, and since in those far-off days each month's trade returns were awaited with bated breath, the attempt to stave off a devalution of the currency occupied far more ministerial time and effort than could be devoted to fulfilment of the party's economic programme. Equally, the Labour government in 1974 inherited sharply accelerating inflation; and just as soon as it had secured its parliamentary majority by a second election it found itself obliged to concentrate on international confidence before it was swamped by soaring prices.
Nowadays, of course, no one gives a fig for the monthly trade returns: after all, have not the United States proved that the savings of the world beat a path to your door if you run a sufficiently impresssive trading deficit? As to inflation, an incom- ing Labour government in 1987 or 1988 could not conceivably inherit the sort of stampede that was gathering momentum in February 1974. Nevertheless it would not be surprising if the trend was moving in the wrong direc- tion. For even if the current rate of growth of credit has not spilled over into prices by then, it must be a racing certainty that as the election approaches (unless the opinion polls appear to rule out a Labour victory) the pound will, in the Prime Minister's phrase, 'take the strain'. If the Tories were then re-elected, the exchange rate would no doubt bounce back vigorously, and so any arousal of inflationary expectations would be short-lived. But if Labour won it wouldn't. In fact it could be expected to go on falling. This, so we are told, is where Mr Hattersley's ingenious scheme to scrap the tax breaks on funds invested overseas would come in nice and handy. The faint- hearted dagoes might take their money and run; but the institutions of the City of London would be repatriating their invest- ments at the rate of knots.
I wonder whether it would happen in practice. Those institutions, confronted with the prospect of forced investment in Labour's national fund for lame ducks if they brought their money home, might well decide to leave their cash abroad and pay the tax. Particularly if, as could turn out to be the case, the eviction of US nuclear bases (one pledge which Mr Kin- nock would certainly fulfil, since his better half would see to that) had already led to an immediate crisis of confidence about this country in the financial markets.
So those confident predictions of but a modest upsurge in inflation look somewhat rose-tinted. But it is on the other side of the ledger it would inherit that Labour says that it would concentrate: the unemploy- ment figures. No doubt it would. But where the distinguished analysts get their figures for the drop in dole queues from I cannot imagine.
It is hard to see any good reason why increased public spending programmes would not do far more for the pay packets of those already in employment than for those without a job.
To my mind there is just one item in Labour's plans so far revealed which could — albeit only over a period of several years — begin to have a real impact on the dole queues. This is their proposed changes in the rules governing monopolies and mer- gers. The Bank of England drew attention, in its June quarterly bulletin, to the sub- stantial role of profit margins in the rise of our manufacturing output prices. Just so. When every quoted company apart from British Telecom and BP (and even they?) has good reason to suspect a predator on its doorstep, margins are bound to be the name of the game. Yet a durable recovery in domestic employment can only come from enhanced market share, of our own and other people's markets. Which is why I do believe that Labour's plans to raise the hurdles for takeovers would be calculated to help.
Not that a Labour government would be rethotely prepared to wait for tighter mer- ger rules to work their way through into boardroom behaviour. So if extra billions on the budget deficit did not make the hoped-for impact on the dole queues, where would they turn? Why, to what they describe euphemistically as 'managed trade'. Protection, in short. Not easy in the EEC? Indeed not. But would that stop them? I wouldn't count on it. And then what price. inflation? On balance, and notwithstanding the good cheer dissemi- nated by the learned scrutineers of Labour's sums-without-numbers, I reckon that if we were to land ourselves with a Labour government at the next election, then the sooner the gentlemen from the International Monetary Fund were once more back amongst us, the better for all concerned.
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