How Relevant is the Budget?
By WILFRED BECKERMAN
rr'llERE is a danger that, in about two weeks' I time, commentators on the budget will have nothing more interesting to say than whether it provides the 'right' amount of deflation from the point of view of its impact on the foreign balance and foreign bankers. For the fact is that, over the last few years, on account of their being addressed almost exclusively to the overall level of demand. the annual budgets have become increasingly irrelevant to the problems of the British economy. It is, of course, always neces- sary to have some idea of the desirable aggre- gate level of demand in the economy. But the continuous fall in our competitiveness over the last ten years or more, as a result largely of the persistent failure to tackle incomes policy effectively, has brought the economy to the point where calculations of an overall nature, centred on notions such as the nation's propensity to import. are a minor sideshow.
Since 1954. British export prices for manu- factures have risen almost three times as much as the average of export prices of all countries taken together. Thus, one does not have to look far for an explanation of the fact that, over the same period, our share in world exports of manufactures has fallen by about 35 per cent. There is clearly a 'fundamental disequilibrium' in the sense of the condition in which the Inter- national Monetary Fund would expect a coun- try to devalue its currency rather than to get worked up about whether it should deflate by £100 million or £150 million. Any other country (except the United States) would have devalued long ago. It is true that Britain is in a rather special position. and anyway, since the present Government did not devalue in October 1964 it is unlikely -to do so now. (And if it had done so in 1964, it might well not be in power now.) But in any case, even if devaluation has to wait for more propitious economic, as well as poli- tical. circumstances, it would still not be a long- term solution unless something' were done about our absurd system of wage negotiation.
It is often argued that our balance of pay- ments difficulties are not caused by lack of com- petitiveness at all, but by other factors, such as a low level of reserves, high overseas defence expenditures, volatile imports, excessive pressure of home demand, etc. etc., and that the fall in our share of overseas markets is merely the
Mr Wilfred Beckerman is a fellow of Balliol College, Oxford, and worked at the Department of Economic Affairs during the preparation of the National Plan. inevitable counterpart of the restoration of the pre-war shares of Germany and Japan. Now it is true that, in the course of restoring their pro- ductive capacity, some countries will expand their total capacity relative to demand faster than others and that this will tend to raise their share in world trade. As a result. other countries, taken as a group, will find their combined share of the market reduced without this implying that they have been particularly at fault. But there is nothing inevitable about the prolongation of such developments long after productive capa- city has been restored. Furthermore, there is no reason why most of the consequential fall in shares in world trade had to be concentrated on Britain long after the reconstructing countries had surpassed their pre-war shares and long after Britain had fallen below hers.
As for the doctrine that a lower pressure of demand will lead to more exports, there never was a good theoretical case why lower demand at home should lead to more than a once-for-all rise in exports, and there is now considerable statistical evidence to the effect that there is no relationship at all between the pressure of demand at home and export performance. A more accurate indicator of our competitiveness, or lack of it. has been the limited effect of the import surcharge.
Thus there is no getting away from the com- petitiveness issue. And if devaluation is tem- porarily ruled out, on political or economic grounds, this means that .much more must be demanded of the incomes policy. But none of the steps taken so far to implement an incomes policy has been in the direction of introducing a centralised system of wage negotiation, in which wage increases would be negotiated for the labour force as a whole in a single massive bargain; and without this it is futile to expect results. Without a centralised system, individual union leaders will alssays be in the impossible position of not being able to resist the demands of their members for increases in line with what some recent 'key' bargain has provided. Indeed, they would be foolish to do so. since if. acting indi- vidually, they acquiesce in agreements by which their money wages rise much less than other unions'. they are inviting a fall in their real wages. Only if unions can organise themselves in such a w ay that their representatives sit round a table together with the employers' represen- tatives will it be manifestly self-destructive for them to award themselves increases in money wages that greatly exceed the likely growth in productivity. Unfortunately, the importance of centralised negotiation is hardly recognised in this country on account of another misconception: namely, that it has failed in those countries that have tried it, such as Sweden, Norway and the Nether- lands. It is usually argued, for example, that wages and prices have risen just as fast there as in Britain. But this argument completely misses the point that the success of a wages policy has to be measured in relation to its objectives. In these small countries, which cannot isolate themselves from the trends in prices in the rest of the world, the -objective of price stability has never been as important as in Britain. These countries have enjoyed, during most of the last fifteen years, a heavy pressure of export demand, so that the alternative to wage increases was either a pointless accumulation of reserves or an upward revaluation of their currencies.
Of course, attempts to introduce some form of centralised wage negotiation machinery in Britain would encounter great social and politi- cal obstacles. If they fail, then devaluation, with all its dangers and limitations, would be the only remaining means of escaping from the fundamental disequilibrium. And even if they succeed, they will require a long haul. Mean- while, therefore. the budget must start playing a role more relevant to a fundamental dis- equilibrium situation than a mere tinkering with the overall level of demand can ever be. There are two main ways in which it can do this, and
both require that it be much more linked to the activities of the Department of Economic Affairs, particularly in the field of promoting exports and import substitution and in the field of incomes policy.
First, the budget has to be much more selec- tive than it has ever been in the past, in the sense of providing export incentives and import disincentives—if not controls—likely to produce a response that is in line with our long-run com- parative advantage, rather than general invest- ment, output or labour-saving incentives spread thinly, and hence ineffectively, across most of the economy. In other words, the budget must begin to be part of a long-run strategy to im- prove our competitiveness, and not merely an independent operation produced by a Treasury whose responsibility is limited to the short-run management of the level of demand. Secondly, the budget must provide the political and eco- nomic incentives, to both management and labour, to participate in a major change in the machinery of wage negotiation. Pending the establishment of such a machinery, fiscal measures could include penalising industries where grossly unjustified settlements have been reached.
In short, until our competitive position is re- established, there will be very little of interest, or indeed of relevance, to say about a budget whose principal concern is the regulation of the overall level of the nation's spending.
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