In the City
Reasons for hope
Nicholas Davenport
The sterling rescue operation proceeds apace. Mr Callaghan was assured of French co-operation at the Rambouillet meeting with M Giscard d'Estaing. Mr Harold Lever, Chancellor of the Duchy of Lancaster, has gone to New York and as he was the creator of the old Basle Facility it looks as if he is discussing with the Americans either a modification of that scheme or the creation of a long-term credit facility which would allow an immediate run-down of the sterling balances held in London. I gave the figures of these balances last week a total of over £6,000 million of which £3,100 million are 'official,' being held by central banks, probably a third of them in the 'short' gilt-edged market. As I said, the stabilisation of these sterling balances is the key not only to the international future of sterling, which is already looking a little firmer, but to the restoration of financial solvency in our own internal accounts.
As everyone knows, we are at the moment stuck in a financial bog. Of all financial writers I have been perhaps the most persistent in emphasising that the higher you push Bank rate up, and the cost of borrowing, the deeper you sink in the financial bog. You don't have to be a yokel to know that when you are caught in a real bog you can't jump out. You have to heave yourself up and devise some stratagem. That is why I get so angry with City people, and even colleagues, who argue that you can jump out of our financial bog with a simple £5,000 million cut in expenditure. As Mr Joel Barnett, Chief Secretary of the Treasury, said this month, that is utter nonsense. If you were to raise council rents by £2 or more and prescriptions and school meals to their full cost, if you were to pay £10 a week for a hospital bed and make a 10 per cent real cut in pensions and short-term benefits, you would still save only £2,500 million--and you would destroy the social contract and any further chance of containing a wage cost inflation.
Cuts in expenditure are, of course, being made—the stricter application of 'cash limits' is having a sharp effect on local authority spending—and we must hope that more can be devised by Mr Healey in his coming 'package.' The IMF team may also have some useful advice to give, not just inane advice to make Simonesque cuts that are politically impossible to carry through.
In the new financial climate of closer international co-operation it is silly to go on suggesting that the British economy is like a rudderless boat gliding slowly towards Niagara Falls the thunder and roar of which is unheard by the stupid captain. When Mr Wilson was the captain you might have been so alarmed, for he has said that when he retired he had no idea of the approaching peril. But Mr Callaghan is a different and more seasoned sailor. He knew what was wrong with the state of Britain when he took over his impossible coalition. Not only had the penny dropped with him but it had been heard dropping all over the corridors of Whitehall. The latest official to tell the economic truth has been Sir Ronald McIntosh, the director-general of the National Economic Development Office. Commenting on the fall in sterling he said that foreign sellers were concerned not so much with the absolute level of public expenditure, which turns out to be much lower than 60 per cent of the GNP, but with its composition. 'The biggest single reason for their lack of confidence,' he said, 'is the high proportion of public borrowing required for non-productive purposes.' He advocated giving more incentives to the creators of wealth—so in effect did Mr Callaghan at the Lord Mayor's banquet. We all know that employment in the public sector is protected by job security and indexed pensions and that it offers more attractive conditions and advancement than employment in the manufacturing indus tries, especially engineering, from which much of the growth in exports will have to
come. In his article in The Engineer Prince
Philip was making the same point as Sir Ronald and the Prime Minister when he deplored the decline in prestige of the
engineering industries and pleaded for the 'successful technological innovators' 10 become heroes again. He properly made no damning exposure of the welfare state. This was left to a Torj, shadow minister who pointed out that after the new rates today, assuming average rent, rates and work expenses, a married man with two children will need to earn more than £75 a week to be better off than an unemployed man getting social security and PAYE refunds. For the laggards the temptation is there—to stay out of work.
As Mr Callaghan has said, we have a long, long, march back to recovery, and he is no young Mao. One is not surprised that clever young socialists, like Peter Jay, should get into despair and become doomsters. Peter was brought up in a good rational socialist home and now that he has seen his brand of socialism utterly fail and end uP in high inflation and high unemployment. his nationalisation programmes decline into mismanagement and deficit, his egalitarianism translated into Wilsonian political patronage and trade union privileges, it was pretty certain that psychologically he would become a doomster. But there is nn excuse for those purblind doomsters of the bookish press who can only see the frustrations and frauds of the British economY ending up in a crash and fighting in the streets.
There is a lot of re-thinking going on in England today in factories, in board-rooms. in trade union offices and the rooms of political power. The English disease is being well exposed and treated as the mental disorder it is. Above all, Mr Callaghan s government is sane and is well informed about the economy. It is not the ignorant government that Dick Crossman has been exposing in his diaries. I shall never forget dining with him one Sunday when he said he must fly to catch a train because the PM had called a cabinet for ten next morning-'God knows what for.' I can tell you what for,' I replied. 'The pound is in terrible trouble.' No one has told me, 'he said. He was a senior minister at the time. TodaY all ministers know the perils of the present economic crisis and the dangers ahead.
Meanwhile the City has recovered from its doldrums and is keeping its cool. The markets are edging up because the common view is that the IMF team will help the Chancellor to produce a package that will begin the slow reduction of the budget deficit and the borrowing requirement; Unless it helps to bring down the rate nt interest I shall remain on the sidelines of the money street—but I will cling faithfully t° the equities of the soundly managed manufacturing companies whose workers Prince Philip rightly regards as the heroes in our fight for recovery.
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