Creeping Devaluation
IT is widely supposed that the present Government, whatever mistakes it may make in the management of the nation's finances, is at least trying to run the eco- nomy in a new way. If only this were true. In fact, the brief period of incipient inno- vation associated with Mr Maudling's tenure at the Treasury is now dead and buried. In 1961 Mr Selwyn Lloyd's great ,,error was to deflate the economy just when unemployment, although very low, was about to rise of its own accord. Today Mr Callaghan is all set to make precisely the same mistake, preparing a 'tough' budget at a time when all the indications are that the undoubtedly considerable pressure of demand is about to moderate itself unaided.
But there is a difference. Last time it was primarily the management of the eco- momic cycle that was at fault—the old error of doing too much too late. This time the position is worse. There is now clear evidence, as Mr Wilfred Beckerman argues on another page, and last week's sombre trade figures underline it, that the British economy is uncompetitive; that is, even if the domestic economy were managed with exemplary skill—full employment, but no overheating—the balance of payments would not take care of itself, but would still be in deficit. This is why Mr Becker- man is absolutely right to conclude that, for a nation whose principal economic prob- lem and obstacle is its balance of payments,. a budget that seeks salvation by regulating internal demand—that is, by raising taxes —is not only wrong but irrelevant.
He is right, too, in his observation that, if the overriding need is to make British exports more competitive in world markets, this will never be achieved by what passes for the present Government's incomes policy. But his own solution is less con- vincing than his diagnosis. Centralised wage bargaining may be all right for Sweden, a country with one-seventh the population of Britain; but in this country the idea of a single wage bargain for the labour force as a whole would be economically unde- sirable and politically unacceptable—look how much trouble even the proposed early warning legislation is causing. Nor, in any event, would a development along these lines have any prospect of bringing British prices back into line within the critically short time-scale set by our appalling balance of payments situation.
So what is left? Only a range of measures that operate on the balance of payments directly. This is a path on which the present Government has already gingerly set out. There has been the 15 per cent surcharge, imposed in the teeth of all our international obligations, shamefacedly re- duced to JO per cent, and repeatedly de- scribed as a strictly temporary measure, even tliou$h its removal would obviously plunge the balance of payments into still deeper deficit. We are now told that it might have to be supplemented by physical im- port controls.
On the export side, there is a modest export rebate of something under 2 per cent which Mr Callaghan has publicly con- fessed be'would dearly like to expand into a far bigger export subsidy, if only the rules of.QATT could be fiddled to allow it. As for the capital account of the balance of payments, in its clumsy attempt to im- prove this the Government has already - imposed a new tax system that does grievous harm to major British investments and foreign currency-earners overseas; and once .aptial„. e have been given the word that the dget may well contain the first halting attempt to regulate British invest- ment in the sterling area—a sensible step, but one with utterly unpredictable short- term repercussions. All these, and similar measures, can, in theory at least, be taken still further.
And what do they add up to? They amount to a creeping devaluation of the —in all but name. Import controls, ex- port subsidies, capital controls (and in the case of portfolio investment, a capital out- flow taxi—all these add up to a back-door devaluation. But unlike an honest devalua- tion, which is not only internationally acceptable—indeed, it is written into the very rules of the International Monetary Fund—but 'politically' neutral, the course on which the Government has embarked involves a mass of restrictions and controls, political decisions and economic distortions, of all kinds.
For Labour, which has always sought a respectable excuse for a dirigismc which is basically unpopular with the British people. there is at least a consolation in this. Whereas in the 1940s it could 'justify' arbitrary controls by reference to the rigours of post-war shortage, today it can point for 'justification' to the rigours of the critical balance of payments situation. The Tories, for their part, have to learn that, in our present predicament, there is only one intellectually respectable alternative to this. And it is not a crude deflation.
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