THE ECONOMY
A blip round the ear for Mr Lawson
JOCK BRUCE-GARDYNE
The inflation rate is judge and jury.' So spake Nigel I awson at the time of his formal abandonment of broad money targets in 1985. Only, as the Red Queen should have told him (perhaps she did), it is 'sentence first, verdict afterwards'. Now we know the sentence. Six months 'tem- porary blip' — with no prospect of remis- sion, and some threat of an extension for misconduct. Meantime the arguments ab- out the verdict continue.
According to Mr Peter Jenkins of the Independent, 'If sterling were part of the exchange-rate mechanism of the European Monetary System — as the Chancellor wishes it were — a modest, one-off de- valuation might have been more desirable; but with the pound vulnerable to the whims of the money markets, the official message is fierce and clear: interest rates will be used to sustain the pound should confidence sour.' Now for all I know Mr Jenkins may have been talking to Master Thomas Lawson, or even to that Downing Street cat whose gender caused a spot of bother during the Prime Minister's recent tour of the Antipodes. But whether the source of this revelation was the kitten or the kindergarten, it seems fair to deduce that it had been programmed in advance of the conversation, by the Chancellor him- self.
Fortunately the first part of the message is entirely academic. Had we really been a paid-up member of the currency club, and responded to the July trade returns with a 'modest, one-off devaluation', those cynic- al money markets would have viewed us as the reformed alcoholic ordering a glass of sherry. But we are not, and are not going to be: and so it is the second part of the message which counts. The interest rate weapon is to he used to the extent that may be required to give some ballast to the pound. That extent could be substantial. Base rates of 13, 14 or even 15 per cent could be on the cards before we are much older. Even if this week's figures for bank lending and broad money growth do turn out to presage the belated end of the credit boom — and the Chancellor was rightly sceptical about that — there are still going to be some months of spectacularly awful trade figures for the pound to weather. The yuppies who organised their double mort- gage reliefs with their live-in girlfriends in the summer are going to have to pawn their videos.
Why they were spurred to take the double mortgages in the first place, by the Treasury's notification in the Budget that they had a three months' window, is a mystery. Now that some of them have caught their fingers under the falling sash, few tears will be shed for them. The Chancellor's gathering critics are now con- cerned to demand an autumn Budget to reverse the tax cuts in the spring, and direct controls on credit.
Reversing the spring tax cuts would present the Chancellor with an even grea- ter embarrassment of riches than he faces already, and make it even more difficult for the Chief Secretary to stare down his colleagues in the autumn public expendi- ture review. As to credit controls, we have it on the authority of the Economic Secret- ary, Peter Lilley, that they 'simply would not work'.
Here I think he doth protest too much. 'The "corset" . . . was abandoned in 1980 because of the probability of large-scale avoidance following the abolition of ex- change controls. . . . Today . . . there are even more ways open to avoid such con- trols than there were in 1980.' True enough, although he rather spoiled the effect by adding that corset-type controls on bank lending 'would work by raising the cost of credit'. Isn't that what higher interest rates are supposed to do? More seriously, he similarly dismissed hire purchase controls on the grounds that 'any required minimum deposit can easily be raised by borrowing elsewhere'. As indeed it can — if you know your way round the system. But if you borrow on hire purch- ase, you do not, by definition, know your way round the system. Finally he dismissed calls for a limit on mortgages related to 'a maximum percentage of the purchase price' of the property to which the mort- gage relates, on the grounds that this would be 'unfair, hitting first time borrow- ers hardest'. As, again, it would: but is Mr Lilley sure that it is 'fair' to encourage first time borrowers to take out mortgages in excess of the value of their property — and then to face the consequences if house prices took a knock, as they might? I'm not.
Nevertheless his basic proposition is surely irrefutable: that the appropriate corrective to apply to a run-away credit boom must be to raise the cost of borrowed money to the level required to scare the borrowers away, and to turn them into savers. The problem is, as it always was, that by the time the inflation rate has delivered sentence, the crime has been committed. A 'blip' of seven per cent inflation can all too easily become the launching-pad for a return to double-digit price rises, as employees claim, and em- ployers are happy to concede, increments at even higher levels. Ford car workers are guaranteed 21/2 per cent above inflation this autumn as the wage round starts. That is liable to become the opening shot for those negotiators who come later in the queue, if we are not very careful.
'Large pay increases can only harm the prospects for jobs', the Employment Secretary, Norman Fowler, told us follow- ing the news that earnings were already rising at nine per cent a year. Sadly, they had better — harm the prospects for jobs, I mean. If employers can pass on nine per cent increases in the cost of all the jobs they currently provide to customers in higher prices, Nigel Lawson's 'blip' will soon become a huge balloon. The Chancel- lor says that he is 'comfortable' with the pound's present exchange rate. But if the autumn wage round indicates that em- ployers reckon they can safely pass on labour costs well in excess of the inflation rate to their customers, he is going to have to think in terms not just of holding the foreign value of the pound steady, but of pushing it higher, so that those in the internationally trading sector of the eco- nomy are obliged to reduce their costs in order to compete.
The Chancellor took his eye off the monetary dials while he pursued his love affair with the European currency system in 1987. Now we must pay the price. There are still at least two clear years to go before the next audit by the voters. A sharp cleansing of the balance sheet over the next six months may, with luck, be forgiven in time. But if Mr Lawson were to allow the level of inflation to accelerate through 1989, his electoral achievements in 1987 would swiftly turn to ashes.
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