THE ECONOMY & THE CITY
Budget Drama or Tragedy
By NICHOLAS DAVENPORT
THE great drama of the budget is being mounted on the political stage and the prin- cipal actors are busy rehearsing their parts. We have heard the first chorus of stockbrokers chant- ing 'Woe! Woe!' in the best Greek manner—a second chorus of gnomes from Zurich is assembling in the wings waiting for their score to be delivered—and the prologue has now been spoken by the wise King Harold and his austere Chancellor James. Rowley. the chief priest from the temple of the Gclden Calf, is warning them in sepulchral tones of the day of reckoning which is surely coming. The part to be played by King Harold's brother George is not yet known, but to add to the drama a god from the economic Olympus, bald, plump and smiling mischievously, has been seen on earth holding two volumes under his arms entitled Essays in Economic Policy. Is this the book in which the budget drama has been written?
In all seriousness, we should carefully study the prologue which King Harold and his Chan- cellor have just delivered. Both disclaimed any intention of running into an inflationary gap. 'We recognise the necessity,' King Harold said, 'to relate our total national expenditure, public and private, capital and current, to the resources that can be made available or brought into being. And this is going to mean tough and unpopular decisions in some cases.' And he added—with a swipe at Rowley, the chief priest: 'It is the Government which takes these decisions.' We can all applaud this statement of high economic principle, and I for one interpret it as implying a partial return to direct physical controls. 'A million pounds spent on schools or housing or roads or productive capital investment in a publicly-owned industry,' King Harold said, 'is no more inflationary than the expenditure of the same resources on a vast block of offices or a private housing scheme.' But if the total demand on building resources is excessive, then it must be cut and this Government will surely prefer to cut it by direct building control than by dear money, which puts up the cost of everything, in- cluding things which want no cutting. The build- ing controls needed were outlined in my article last week.
Chancellor James followed up this royal pro- logue by solemnly warning the private sector of the economy that its demands on the national resources must be reduced. As the public sector is spending more—the supply estimates for 1965-66 are up by 8.9 per cent—and 'may need to ab- sorb a larger share of our gross national product than it does today . . . this will mean a corre- sponding containment of the rise in private sec- tor expenditure.' But he did not reveal the size and method of the cut. As public sector spending is to be related in future to the pros- pective increase in national production, which implies an average rise of 41 per cent at constant prices, the private sector is obviously facing a sharper slowing-down of its rate of expansion than the public sector. These were ominous words. If physical controls (apart from build- ing) are not readily available—and it will take a little time to set them in motion---the King may order his Chancellor to increase taxation until it hurts the private sector. This is the
moment in the drama for which the Chancellor is waiting, for he sees himself cast in the role of the greatest tax reformer of the century. With this magic, he claims, taking hold of the Essays in Economic Policy, which the genial god has just put in his hands, I can cut down monetary demand in the private sector to the bone.
Now the wise King Harold is no doubt pleased to see that his Chancellor intends to increase direct taxation, not indirect. Any increase in indirect taxation—through the purchase tax—puts up the cost of living and makes a further round of wage claims almost inevitable. No one has yet told him that the buying power of the wage- earner can be damped down without raising the cost of living by increasing the hire-purchase de- posits required on consumer durables. It is by such a simple oversight--by such a small mis- take—that a wrong action can be taken which will bring down the wrath of the gods upon the King and his whole Court.
By a curious stroke of fortune, the two volumes of Mr. Nicholas Kaldor's Essays in Economic Policy have just been published.* They are all masterly and the last part of volume one contains his judgment on the problems of tax reform. His role of tax specialist took him to many faraway lands, he says, in the universal quest for more public revenue, and as he in- variably advised putting more of the burden of taxation on the privileged minority of the well-to- do, it earned him a lot of unpopularity—and caused quite a few national strikes—without suc- ceeding in making the property-owning classes contribute much more to the public purse. The reason, he explains, is because the business power behind the scenes proved to be very much greater than the politicians had suspected. Is this the situation facing King Harold and his Chancellor today? No one can yet say.
We may all agree with Mr. Kaldor that the present system, of taxation in this country is 'absurdly inequitable'—to a degree unknown and unsuspected by the general public. To rectify the inequities in the company world the Chan- cellor is introducing a corporation tax, which at 40 per cent could spell murder for shareholders. To rectify inequities in personal taxation Mr. Kaldor proposed not one but five different taxes: (1) ordinary income tax, (2) a tax on realised capital gains, (3) an annual wealth tax, (4) a tax on total personal expenditure over a certain limit, and (5) a general gift tax payable by the recipients—to take the place of death duties. Chancellor James is contenting himself for the moment with (1) and (2) and has already given notice of raising (1) from 7s. 9d. to 8s. 3d. What will be the rate for (2)? Will it be 8s. 3d. or 7s. 9d. or 6s. or 5s.? On this everything hangs. Mr. Kaldor is well aware of the distortions caused to a man's behaviour, either as con- sumer or producer, if the taxation imposed upon him is considered to be unfair or unreasonable. It can make him work less bard or take fewer risks or spend more and save less. It can also make him emigrate. Now the danger of the capital gains tax is that it is a form of double taxation which can kill enterprise. It is levied on companies as well as on individuals, although * Duckworth, 50s. each volume. companies do not exist as legal entities apart from the individuals constituting them, and if it is at a rate which is considered penal and unreasonable it will undoubtedly slow down both company and individual initiative and freeze the capital market. Coupled with a corporation tax of, say, 40 per cent, and an income tax of 8s. 3d., it could shock the private sector into a mood of non-cooperation.
So the end of this Greek drama, if it is to end in tragedy (which may the gods yet avert), will be that the Government will not get the eco- nomic growth ratio on which everything depends —not only exports, but social welfare too. And political power for that matter also.
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