ECONOMICS AND THE CITY
Facts of life for Mr Healey
Nicholas Davenport
It must have come as a shock to Mr Wedgwood Senn — and perhaps to some contributors of The Spectator — that Mr Ilealey's plan for re-cycling surplus oil dollars through the IMF ($6000 million) should have been adopted by the EEC finance ministers and that they should have appointed him as their spokesman for the current talks in Washington on the world monetary crisis. As Mr Benn lists in his clever anti-Market letter to his constituents the monetary union policies of the EEC as part evidence that the UK is in danger of losing sovereignty and becoming a mere province of a great Western European State he must have been amazed to see our own Chancellor elected as king of the EEC finance ministers and enjoying for a time a wider sovereignty than would have been possible for the finance minister of a little off-shore island in the red. But heaven forbid that I should bring the Market into this monetary discussion! I must leave this highly complex question to be settled by the referendum vote of my honest charlady and the fifty million good simple people like her.
As the trade figures for the year have now been published it will be useful to consider how we stand as a sovereign trading nation. As December happened to be £150 million less bad than the awful November figures the year 1974 ended with a visible trade deficit of £5187 million and, after crediting 'invisible' income of £1458 million, a net deficit on current account of £3729 million. Mr Healey has already publicly thanked the City for providing 'invisible' income from its investments and services abroad of around £120 million a month. We would have been sunk without it, for we have no reason to be complacent about our export performance. The rise in export prices, which has been turning the terms of trade in our favour, must be worsening our competitive position and in fact exports in volume and even in terms of value have been falling since September. It is disconcerting to see that the recent fall in imports was due to smaller purchases of industrial materials for processing.
It is foolish of the union leaders to say that a bad export performance is due to lack of investment: It is due partly to delays in delivery due to strikes and partly to the onset of a world trade recession. The motor trade, which has been the worst hit, has also had the worst record for strikes. Let us face it; the payments outlook is still horrific. After reckoning that the extra cost of oil imports last year was about £2,200 million — it will rise to about £3,000 million this year — the non-Arab deficit we have to eliminate is around £1,500 million. We have little hope of doing so if a world recession deepens. The only chance of avoiding a sterling catastrophe — apart from Mr Healey's $6,000 million IMF re-cycling and an equal amount from OECD loans — is that the world recession will be short-lived. Here President Ford is doing his best to come to our rescue. In his State of the Union message he has come down heavily on the side of reflation. Believing that the future of the industralised democracies is at stake and that America must give a lead he has proposed to Congress that taxes be cut in this fiscal year by $16,000 million — projecting a budget deficit of over $40,000 million — of which $12,000 million go to individuals with $80 in cash for all over eighteen who are in the category of 'very lowest incomes'. To save energy he proposes to put taxes of $2 a barrel on oil, domestic and imported, and an excise tax on gas, while lifting the price control on oil and gas and putting a windfall profits tax on oil producers. This will add 10 cents to an American gallon of petrol and 2 per cent on the price index. The energy taxes will be pumped back into the economy. The package will not have an easy passage through Congress but what is certain is that reflation will come in the US — at the risk of worse inflation in 1976-77 — and that the President may be right in saying that "a resurgent American economy would do more to restore the confidence of the capitalist world than anything else we can do." There is further hope that the world recession will be short-lived because Germany has also decided to reflate. She is in a better position to do so, for hers is the only European economy which was able to record a large surplus on its international payments in spite of the quadrupling of the price of oil. The Bundesbank started to lower its discount rate towards the end of last year — it is now only 6 per cent — and in December the government produced a reflationary package of DM1.7 billion in an effort to spur
investment and consumption. As unemployment had risen .to near a million it was felt necessary to
create new jobs and aim at a growth rate of 2 per cent to 21/2 per cent. It looks like being attained.
It is clear that Mr Healey must not attempt to follow the reflationary examples of America and Germany while the balance of payments deficit is running at its critical danger point for sterling, i.e. at 6 per cent of the GNP. Indeed, he must keep on an anti-inflationary course and this requires, first, that he must cut government spending to reduce the £6200 million borrowing requirement, second, that he must insist on the social compact being honoured. About a quarter of the wage claims settled since freedom was restored to bargaining have stretched or broken the compact. Mr Healey must now insist that wage claims must only be made at twelve month intervals and must not anticipate price rises. If prices do rise after a settlement the standard of living will, of course, temporarily decline. And Mr Healey must tell the unions to accept the rise in unemployment — most of them will do so, as it usually gains them more members from outside non-union labour — and to trust his management of the economy.
After all, Mr Healey returns from Washington with greatly increased prestige. He secured agreement, as he told correspondents, "to set up two major new pieces of machinery which will secure jobs and protect living standards for hundreds of millions of people round the world" — including Britain. Mr Healey is certainly becoming the strong man of the Labour Government. Is he not strong enough already to tell the unions and the lunatic left where they get off?
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