ECONOMICS AND THE CITY
Pre-budget talk
Nicholas Davenport
The Cambridge school of economics is back in power at the Treasury. This could be a dangerous intellectual infiltration if it were not for the fact that no two economists ever agree. It used to be said that if three economists were assembled in a room and one of them was Keynes there would be four different policy recommendations. Robert NeiId, it seems, would have the Chancellor Produce a severely deflationary budget. Nicholas Kaldor, while agreeing with Robert NeiId that the Tory financial policy of tax remissions (£4,000 million) and easy credit for property speculators and consumers had been Wildly inflationary, would not attempt to eliminate the budget deficit by over-taxation. To achieve financial balance by conventional methods of taxation (income tax or indirect taxes) Would, he says, cut into the standard of living of wage earners so drastically as to aggravate the pressure for wage increases and give a further twist to the inflationary spiral. Now that some Skilled workers are earning gross incomes of up to £5,000 a year and many others between £2,000 and £3,000 a year there would be a howl of dissent if Mr Healey proposed to raise income tax. We have not yet had a workers' strike over direct taxation but it is not impossible. No one squeals at higher taxes more than the nouveaux riches.
It is useful to recall the sweeping tax reforms which Mr Barber put through during his tenure of the Treasury. In my view these reforms were soundly conceived and did away with a lot of absurd complications. As from April 1973 the basic rate of tax on gross incomes (after personal reliefs) is 30 Per cent up to £5,000. On the next £1,000 it is 40 per cent, on the next £1,000 45 per cent, and on the next £1,000 50 per cent. This brings us Up to £8,000. On the next steps of £2,000, £2,000, £3,000 and £5,000 the tax rises to 55 per cent, 60 per cent, 65 per cent and 70 per cent. So the man with £20,000 a year Will be paying 70 per cent. If he has unearned income in addition, he could pay in tax up to 90 per cent. Surely that is enough. It is higher than the top rate under the Previous socialist government, Which was 881 per cent. Is Mr Healey prepared to raise the rate of tax on incomes up to £5,000 or will he start at over £5,000? On the election manifesto he will surely go for "soaking the rich." It would delight his leftish supporters, if he would soak the rich sufficiently to pay for the subsidies on food prices.
Now there were certain parts of Mr Barber's reforms which were unnecessarily favourable to the rich — allowing children's income to be treated separately from the parents' income, allowing interest on borrowings (in addition to house mortgages) to be set off against tax. These allowances, which enabled the Labour Party to say that Mr Barber had been socially divisive and too cringing to the rich, will surely be removed by Mr Healey. Further he may resort to a surcharge on investment income as Stafford Cripps and Roy Jenkins did. This would be administratively easy. The introduction of a complicated wealth tax is hardly likely in the short time at Mr Healey's disposal but a simple gifts tax could be proclaimed with the warning of a wealth tax to come.
There is talk in the City that the capital gains tax might be increased or a short term capital gains tax re-introduced but how this could be regarded as equitable it is difficult to see. Inflation has eroded the real value of all paper investments and the decline in the last twelve months in the money value of all equity shares quoted on the Stock Exchange has been of the order of £50,000 million.
If Mr Healey could disabuse himself of the need of soaking to any harsh extent the now much impoverishedrich he would be able to attend to the urgent economic needs of our flagging industries. He should try first of all to bring down the rate of interest. No industrialist is likely to step up his investment when money costs him over 171 per cent and sometimes more than his expected rate of return on capital. Indeed, if there is a free-for-all in wages and strict control of prices his return could be negative.
To reduce home rates of interest requires a two-tier system of interest rates, as I have constantly argued. To make our industrialists pay the Euro-dollar rate plus the discount on forward sterling is ludicrous. This should be confined to foreign money coming into London. For domestic purposes we need something around the building society mortgage rates. The building societies are now in dire straits and need the injection of capital from the life and pension funds.
We can all agree with Nicholas Kaldor that the main economic task of the budget is to re-deploy our resources away from home consumption towards the export markets. Mr Barber injected money into the consumer trades although Mr Heath's real objective was to raise exports through our entry into the EEC. Yet since the beginning of 1970, as Kaldor points out, our exports to the EEC increased in volume by only 50 per cent (or £1,900 million a year) while our imports from the EEC increased by 80 per cent (or £3,100 million a year). The required redeployment of resources can only be attained, in Kaldor's view, by unconventional methods such as the re-introduction of SET.
A 15 per cent pay-roll tax on service trades, he says, would yield over £2,000 million a year and release some 500,000 workers for employment in manufacturing industry with only an insignificant effect on working class cost of living. I hope the Chancellor will not heed this advice which would be a retrograde step and administratively costly. There are more simple ways of helping the export industries through employment subsidies and the retention of the regional employment premium. It was good to see that the Bank of England in its March Bulletin stresses the need to divert domestic resources into exports although it seems to prefer the conventional and not the Kaldorian method of increasing taxation. We are all conscious of this stark fact that unless we can increase our exports and reduce our imports we are sunk.
If he puts economics first, and soaking the rich second, Mr Healey, shorn of his Marxist claws, could even be constructive on March 28.
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