Central bankers and ourselves MONEY
NICHOLAS DAVENPORT
The Bank of International Settlements at Basle is the monthly meeting place of the central bankers who lend us all those millions. Natur- ally they keep a close watch on how we spend our money and it must be particularly irritat- ing for the Chancellor to read in their lengthy annual report that we have been spending too much and saving too little and that government spending must sooner or later be cut. For the report is published just after Mr Callaghan had announced that 'the period of standstill in the economy is over' and that reflation will start in the consumer durable trades. The cut from 40 per cent to 30 per cent in the hp deposit required for motor cars and the lengthening of the repayment period from twenty-four to thirty months are bound to cause a consider- able upturn in consumer spending. When the deposit on motor cycles and three-wheelers was reduced from 40 per cent to 25 per cent in the April budget it let loose quite a boom demand for those consumer durable goods.
One does not have to pay too much atten- tion to the views of central bankers. They in- variably get their economics wrong and they have a prejudice against all forms of govern- ment spending. But on this occasion the BIS. do not appear to be opposed to the 'new econo- mics' but rather to the inadequate fiscal action taken by the American and German govern- ments last autumn which led to an inordinate rise in interest rates and a decline in private industrial investment. They ask for a 'better policy mix' in future. Mr Callaghan has admit- ted that when private investment revives it will be necessary to cut back public investment, but I doubt whether he will welcome this caustic comment of the ins: 'The experiment conduc- ted in the UK to test the novel theory that forced-draught expansion of the economy would itself eventually right the balance of payments deficit was abandoned last July after more than two years of negative results.' Will the BIS regard his reflation of the consumer durable trades as another 'forced-draught' ex- pansion of the economy, which should normally be righting itself when wages rise after July?
The BIS have a good point to make about savings if only they had formulated it in a more erudite way. Private savings are too low partly because taxation of private incomes is too high, partly because the rise in prices through indirect taxation has mopped up the rise in personal incomes. This is brought out in the following table which I have extracted from the last bulletin of the National Institute of Economic and Social Research:
Consumers' Real Disposable Income (at 1948 prices) In E million Quarterly Income 1965 5,264 1966 5,271 1967(1) 5,204
This table certainly suggests that personal savings in the UK are low by American and European standards, where the average ratio is around 9 per cent, but it does not mean that we have not been saving enough .to finance the national investment 'Public' savings make good the shortage of private savings and these have
Expenditure Savings Savings Ratio 4,823 441 8.4%
4,899 372 7.0%
4,940 264 5.1%
been steadily increasing through the surpluses budgeted for on central and local government account. The last Financial Statement Mr Cal- laghan presented to Parliament showed that the surplus on public sector transactions was £2,271 million in 1966/67 and estimated at £2,432 million for 1967/68. These huge sur- pluses are the reflection of the over-taxation we suffer at the hands of central and local governments. Public savings are merely the forced savings extracted from overburdened taxpayers and ratepayers.
Central bankers who criticise the conduct of our economic affairs never seem to penetrate below the surface of our national statistics. They demand more savings, more taxation and more investment in a conventional way while what we need is less taxation, more incentives for harder work and risk-taking, and more pur- poseful investment in an unconventional way. In both public and private sectors we have seen much wasteful and extravagant invest- ment. Take, for example, the public investment in nuclear power the extravagance of which has lately been exposed by Mr Duncan Burn in The Political Economy of Nuclear Energy. In- deed, the whole national investment in energy divided between three competing public boards is likely to end in some waste of public funds. The Minister of Power seems to be doing his best to drive private investment out of North Sea gas whereas he should be considering how to encourage the oil companies not only to get oil as well as gas out of the sea but to get oil out of inland coal and make us less dependent upon the Middle East. It is surely significant that some of the large American oil companies have been buying up domestic coal fields in order to develop the new oil-from-coal pro- cess. It seems a pity they cannot buy up Lord Robens.
If we are to get more purposeful investment in the private sector we will have to alter our taxation laws. The investment grants are 'selective' but Whitehall has not the industrial expertise for proper selection and the ten- dency is for these grants to encourage conven- tional extension of factories and old production techniques merely for the sake of company tax saving. The Government is now introducing 'regional employment premiums' in the devel- opment areas and is tacking them on to the discredited Selective Employment Tax, which discriminates quite irrationally against all ser- vice industries and in favour of all manufac- turing industries. (The latest figures of employ- ment showed that it was manufacturing which had lately lost labour!) All this will lead to further wasteful investment, and perhaps to further unnecessary imports. There are many service industries (like hotels) where skilful in- vestment would have less import-sucking effect and more balance of payments gain. That more purposeful investment is needed is perhaps be- ing appreciated at long last by the Govern- ment if the appointment of Mr Michael Posner as Economic Adviser to the Treasury in suc- cession to Mr Robert Neild means anything at all. As a socialist Mr Posner has always be- lieved more in industrial reorganisation and rationalisation through mergers and purposeful
investment than in overall management of the economy through taxation and interest rates. In this respect he is more at one with the central bankers than Mr Neild.
Tie BIS have much 6) say about the difficul- ties in the gold exchange standard which I must reserve for later discussion, but it is a step forward when bankers realise that excessive use of dear money and tight credit will bring on a world recession if too many countries pur- sue- such policies at the same time. I only wish that they had more understanding of what Britain needs by way of an economic policy.
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