`LIE EOBVArUf `ME @DIM • , More Capital Curbs Ahead
By NICHOLAS DAVENPORT
BFIORP. the election. Mr Callaghan saw no need for any 'severe increase' in taxation. But our foreign creditors are doubtless watch- ing the trade returns with the eyes of a Zurich lynx. Indeed, in its March report OECD's eco- nomic section bluntly declared: 'If clearer signs of continued improvement in the foreign balance are not forthcoming it may be necessary to take additional budgetary or other action to restrain the growth of domestic demand.'
Now the 'visible' trade returns fluctuate hor- ribly and those for March were disappointing. Exports were £18 million down from the record February total, but 5 per cent above the average for 1965. Imports were barely changed, but 5 per cent higher than the 1965 average. Revised on a 'balance of payments' basis, the 'visible' deficit was £22 million compared with £6 million in February and £45 million in January, making £73 million for the quarter. But this follows on the miraculous quarter ending December. when the 'visible' deficit was only £34 million and there was actually a surplus of £8 million after crediting net Invisibles.'
Looking back on 1965—when imports were up by only 1 per cent and exports by no less than 7 per cent—M-r Callaghan can congratulate him- self on having halved the 1964 deficit of £535 million on 'visible' trade. Imports of finished manufactures, it is true, were still rising, but more slowly. Capital goods, for example, were being imported at only half the rate of growth of 1964. Exports were buoyant because world trade was expanding strongly and the United States was booming. Our exports to North America increased in value by no less than 18 per cent. But we cannot boast about this export achievement. Although we exported 8 per cent more manufactures last year, the world trade in manufactured goods increased by 121 per cent. If world trade were to turn down sharply, our payments account would really be sunk, the 'visibles' being so huge. (Imports £5,044 million and exports £4,779 million.) Or if the terms of trade were to move badly against us—as they may do on the current rise in metal prices—we could be thrown out of balance again. (The more favourable terms of trade last year accounted for about £100 million of the improvement.) So we are not yet strong enough to meet adversity
The potential loss of about £40 million of trade with Rhodesia is bad enough, but we really
could not afford to lose £265 million of trade with South Africa. To secure and hold our balance we must trade as hard as we can with everyone, the devil included.
The 'invisible' account is also not strong enough to meet any emergency in the `visibles.'
It would be tine if the Government could drasti- cally reduce its net spending abroad of £454 million (defence about £280 million), but there is
no sign of it. even east of Suez. Shipping is now running a small debit and travel a larger one tit could be over I:100 million this year). Apart from 'services.' which are steady at -I- £235 million, the only satisfactory 'growth' item in the Invisibles' is 'interest, profits and dividends,' which have been rising strongly from +£238 million in 1960 to +£454 million in 1965. But as the Government has set its face against both direct and portfolio investment abroad, this item will soon begin to fall. Already there has been a dollar portfolio disinvestment of some £368 million (£52 million private and £316 million Government)—much. I gather, to the annoyance of the Governor of the Bank.
However, as we are a rich country—indeed, a creditor country. though we have an excess of liabilities on a short-term oasi's—our creditors will not be too worried about a easonable deficit on our trading account if they s.. that we are managing our capital account sInc;blv and wit4out damage to the security of out official debtiOn this point they have nothing to fear from a Labour government which prides itself on putting public before private capital interests. Mr Callaghan has already taken measures to discourage and restrict direct investment abroad and is trying to secure more disinvestment in private dollar portfolios.
Last year the net long-term capital outflow on private account was reduced from £247 million to £137 million, but this cloaks the fact that the net private investment in the overseas sterling area went on increasing—from £148 million in 1963 to £212 million in 1964 and to £252 million in 1965. This was due mainly to the re-investment of surpluses accruing, but it has been suggested that a capital leak is occurring and that the Chancellor will eventually he forced to put an
exchange control on movements of capital into the sterling area, which would be very unpopu- lar in both the old and the new countries.
I should add that the short-term -capital move- ments in 1965 balanced out. There was an out- flow in the first eight months and an inflow in the last four months of the same size after the September revival of confidence in sterling. That the balancing item of unrecorded trans- actions was favourable to the extent of £105 million suggests that leads and lags' were return- ing to normal. 1 can see nothing alarming enough in the trade returns so far to cause a reversal of this trend and to set another flight of capital in motion, but our creditors must be well aware that when the import surcharge is removed selective import quotas will have to be imposed for a time. Clearly, the trading position is not strong enough to meet any adversity without the protection of some import quotas. I cannot see the Chancellor condemning the economy to stagna- tion for two or three years while surpluses are being painfully accumulated on the payments account to repay the £900 million of IMF debts. I do not believe that a severe deflationary policy is possible for a new Labour administration which has proclaimed 'growth' as its target and the old policy of 'stop-go-stop' as its bête noire. This balance of payments analysis suggests that the Chancellor is more likely to call the capital account of the nation into play to keep our creditors quiet while Mr George Brown is.can- vassing the unions and the managements on the possibility of a temporary wage-price-dividend freeze pending the report of the Prime Minister's new productivity conference. This year's May Day is not going to be a time for celebration.
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