PITFALLS FOR THE CHANCELLOR
By NICHOLAS DAVENPORT
IN the past so many of Mr. Butler's eagerly awaited statements of economic policy haVe turned out to be damp squibs. It is possible that the contents of next week's supplemen- tary Budget will be another anti-climax. But Mr. Butler cannot be satisfied until he has secured a surplus of some hundreds of millions to cover investment in the Com- monwealth overseas. That has always been his objective. He must therefore do some- thing more to bring the international account into balance. He told the Conserva- tive Party delegates at Bournemouth that 'monetary and fiscal instruments' were to be made effective until the 'inflationary in- flamation' had been cured. This seemed to suggest raising the purchase tax on motor- cars, wireless and television goods and other 'luxuries.' By keeping home demand in check, he said, we call balance our over- seas payments. This presupposes that the manufactures which he sets free at home will in fact be sold abfoad at our prices. But it is not so easy as all that. Take, for example, the motor industry which accounts for about 10 per cent. of the value of our total exports. If the Chancellor raises the purchase tax on cars so steeply that he causes a slump in the home trade, it means that our costs of production, which depend on volume of output, will rise and our sell- ing prices will not be competitive in the markets overseas. Even if he leaves the purchase tax untouched but, on the grounds of economy, holds up the road improve- ment programme and so restricts the natural expansion of the motor industry on which the recent factory extensions have been planned, he will prevent a lowering of costs and make it more difficult than ever to balance our international account with larger exports of motor-cars.
What I am afraid of is that the Chancellor will be led into making wrong decisions, such as raising the purchase tax on cars, just because they involve only 'monetary and fiscal instruments' and avoid any return to the 'direct controls and licences which are anathema to his party. But if you will examine the latest White Paper (Cmd. 9585) on the UK balance of payments you will find evidence that we got into deficit trouble in the first six months of this year by having restored too much freedom too soon to our importers. Comparing the first half of 1955 with the corresponding half of 1954 it will be found that our imports from the dollar area rose by no less than £114 million or 471 per cent.•1 am sure that this reflects the new freedom given to the commodity trading markets in the City to buy their cereals, metals and other raw materials in any country in the world regardless of its currency. Would it not he wiser to restrict their freedom by direct currency allocations than to interfere with the expansion of such a key industry as motor manufacturing whose exports are vital to the balancing of our international account? The only in- dustry which the Chancellor can safely interfere with without damage to our ex- port trade is the building industry, and any further cuts in local council housing, coupled with a rise in rents through a re-
duction in the housing subsidies, would be sound disinflation measures. But any attempt to restrict domestic trade by rais- ing purchase tax is dangerous. The economic decision which the Chan- cellor has to make is therefore critical. Let us hope that he will not be too optimistic about our export trade. He told a dinner audience this week that we are not facing an emergency, that it is not a critical,situa- tion. But a deficit on the international account is always a critical situation for a
country which cannot eat and work without exporting manufactures. If sterling were really undervalued, as the Governor of the Bank maintained at the Mansion House dinner, there might be no need to worn about our overseas payments, for they would before long reach a balance, but a continued deficit will suggest that sterling goods are overvalued in the export markets. (Purchasing power parities for travelling international bankers are not the governing factor for exchange rates, Mr. Cobbolc.1.1 So I implore the Chancellor to be careful not to raise the c'osls of our exporters. A wrong decision next week may turn the country from disinflation to depression.
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