In the City
A diet of thin gruel
Tony Rudd
ir Geoffrey Howe's latest Budget con-
tinues his prescription for this country's economic ills by a diet of thin gruel and the intermittent application of leeches. This year there is a little more gruel and fewer leeches but the strategy remains the same. Not for Sir Geoffrey the easy way out of allowingthe patient a quick restorative Which would bring colour to his cheeks. He knows too well that this has been tried by his predecessors and that their repeated failure to deal with the* deep-seated ills Which+a sL...l plague the body are precisely What has brought his patient to the present Pass. This time the cure is to be thorough and the purge complete. Happily the worry- ing signs that the patient might die have Passed. The pulse, though faint, is distinct and if anything, quicker than this time last Year. Next year, who knows? If we go on like this we may be able to take our first tot- tering steps into the fresh air. So completely has Sir Geoffrey won most received opinion round to his views, that, except for the ritual clamour from the Op- Position, he has a substantial degree of sup- Port for his policies, a fact which was evi- dent from the favourable reception which this Budget received. There are very few People around now who think that it is the Job of government to try and manage de- mand. That ,is presumably because they are convinced that governments can no longer 1(11 so — that if they try and pump purchas- ing Power into the economy they only affect Prices and not output. So the whole concept of the Government trying to run the e.c°1101ny through fiscal policy which is ad- justed in successive budgets has been put a, side. Otherwise we would now be seeing large deficit financing as the Government attempted to make up for the lack of de- rnand in the private sector by generating de- mand through those parts of the economy that it controls and particularly by increas- ing investment in the roads which are full of
potholes, the railways which are visibly flagging and other parts of Britain's ageing infrastructure.
This, however, is what the Government's economic policy and Sir Geoffrey Howe's latest Budget is not about. And yet this hands-off policy is not universally accepted as the right prescription these days; the French, admittedly under a Socialist government, are now pumping huge amounts of purchasing power into their economy mainly through investment pro- jects. Even West Germany, that country of financial rectitude, seems now to be set upon a government-induced reflation. Sir Geoffrey has made it clear yet again that this Government is not going to follow this route.
Inevitably that meant that the Budget became mainly a technical affair. On that level it was extremely well managed. If it's a matter of grinding the faces of the poor with candle ends, then it must be said that Sir Geoffrey has done an extremely adroit job. Few Chancellors have managed to pro- duce in the same Budget a lowering both of the borrowing requirement and of taxation. In Budget-making that is the equivalent of a double first. It was achieved as a result of last year's level of inflation being slightly higher than the Treasury had expected when they framed their policies a year ago. As a result everybody was pushed into higher tax brackets and, as they say in the jargon, the Revenue was buoyant. It's an ill wind... Hence the leeway which the Chancellor had and out of which he was able to produce the cuts in taxation which he skilfully spread around the deserving cases.
The most important element in the cur- rent economic strategy is the part that was actually left out of the Budget, namely the policy of getting interest rates down. Now that there is no longer an official Bank Rate to announce, the Chancellor has forfeited
the opportunity of putting a change in of- ficial rates into his Budget speech, which is why Sir Geoffrey's 'exercise on Tuesday seemed to be such thin gruel. But in fact his policy marks a final reversal of the tactic begun by his predecessor Mr. Healey in the April 1978 Budget, in which an increase in budget expenditure was announced alongside an accompanying increase in Bank Rate. That Budget ushered in the period of extremely high interest rates from which the country has been suffering ever since.
Last year the hope was that interest rates would fall and that the economy would begin to resuscitate. These hopes were disappointed mainly as a result of the ex- tremely high levels of American interest rates. But the domestic demand for money and credit exceeded expectations too. So rates have stayed obstinately high. Now at long last they appear to be on the point of coming down. It is to assist in this that the Chancellor has been almost miserly in his handling of the PSBR. Many observers think that he could safely have got away with a figure £1 billion or even £2 billion higher than the £9.5 billion that he has plumped for. He is taking no risks. And in this he is probably right. For the historically almost record level of real interest rates which we have now is the absolute reverse of what is needed by industry in a depres- sion. The only snag is that, contrary to what some people have been saying recent- ly, interest rates in this country cannot real- ly go down unless they also go down in America. With inflation failing it is of paramount importance that the cost of bor- rowing should fall as well. Otherwise any nascent recovery will be strangled.
From the City's point of view the two most important direct measures announced in the Budget were the new policies of mak- ing indexed gilt-edged securities available to all rather than, as hitherto, just to the pen- sion funds and institutions; and, secondly, the forthcoming adjustment of capital gains .tax for inflation. The general availability of indexed stocks will henceforth mean that the investor can, if he wants, always guarantee for himself a performanCe for his investments that betters the rate of infla- tion. Had such an indexed stock existed say 20 years ago, an investor would have done extremely well to have held it; much better than if he had held the average portfolio of so-called `growth' shares.
The taxing of capital gains during a period 'of inflation has of course been one of the most unfair anomalies of the whole fiscal system and has involved the enforced transfer of a considerable amount of wealth from the individual to the State on a scale much more substantial than might have been achieved by an orthodox wealth tax. Although manifestly unfair it didn't necessarily seem that anybody was going to change the system, particularly as there were obviously administrative reasons for leaving the whole thing as it was. The fact that Sir Geoffrey has grasped this nettle is Very much to his credit.
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