In the City
The White Paper and the black
Nicholas Davenport
What a contrast is presented in this split society tetween the comparatively well paid workers in the City and the comparatively badly paid workers in some of the public services! But the City is run by lively intelligent people who know how to make a profit out of their money business whereas the work-force of the economy outside is run by not so intelligent people who, when they are bosses of closed shops, insist on demanding increases in pay far beyond the increases in output. The reason why this fatal state of stagflation does not bring the nation rapidly to bankruptcy and starvation IS that our 'invisible' income from investments and trading overseas and our oil from the North Sea are giving us the respite of a surplus on our balance of payments. But the surplus is thin, and the net invisible income is shrinking and the oil flow will begin to Slow down in perhaps five years time. So we have only a few years to come to our senses and heal our split society.
With these sombre thoughts we should all Sit down to ponder the new White Paper called The Government's Expenditure Plans 1979-80 to 1982-83 (price £4.25). It is a brave survey of the future, and a more realistic paper than its predecessors, but it purports to commit the Government to an increase of 2 per cent per annum in the volume of public spending which it believes to be well within the trend of the annual increase in the gross national product. It is all a lot of make-believe. By the time the Paper was circulated the Treasury knew that the pay explosion would upset the trend of the GNP growth and might even stop growth altogether.
True, this White Paper is more realistic than its predecessors because it gives the effects of three different versions of the Projected rise in pay over five years. Case 1 is a rise in average money earnings of 7 per cent this year and 5 per cent in future. Case 2 is a rise of 7 per cent and case 3 a rise in Yearly earnings of 11 per cent which is more but not exactly realistic. According to the Treasury Case 3 reduces the annual growth of output from 3 per cent to below 2 per cent and creates a rise in unemployment over the five years to over two million.
It is not to be expected that the men on the closed shop floors will read the 255 pages of this massive White Paper, but do you suppose that their leaders will read it and try to convince them that unrealistic increases in pay without realistic increases in output will aggravate the inflation, will make their extra pay buy less, will push unemployment up beyond the two million level and eventually bankrupt the nation? No.
To achieve such a miraculous response there would have to be intelligent as well as moderate trade union leaders and this apparently we have not got. Certainly not at the Transport and General Workers Union, who can no longer control their branch officials. The White Paper will probably be stoking up their pickets' fires.
The City's immediate interest in this White Paper lies in the estimates of the PSBR (public sector borrowing requirement) for these determine the size of the government `tap' issues and the morale of the gilt-edged market. At first sight the estimates are reassuring, for the forecast of the PSBR in 1978-79 (at 1977-78 prices) is only £7.3 billion which is £700 million below the GGBR (general government borrowing requirement). And it goes down to £7.2 billion in 1979-80 and to £6.8 billion in 1980-81. Of course, this is in 'funny money' at 1977-78 prices — not at current prices which would be higher.
If you are getting confused by this jargon let me explain that the PSBR is equal to the sum of CGBR, LABR and PCBR where CG stands for central government, LA for local authorities and PC for public corporations. They may be all 'quangos' to you but for the City the PSBR is Gospel.
The trouble is that the City is never quite sure exactly what the figure of the PSBR is likely to be. It is affected by the curious short-falls in the planned total of public expenditure which have lately come to light. For example, a short-fall of £1037 million has been identified in 1978-79 and the Treasury has estimated that a further £963 million will emerge. So for 1979-80 a short-fall of £2,000 million is assumed which will reduce the figure for the PSBR. For the gilt-edged market this is good, if crazy, news. It should have no difficulty in taking up the amount of 'tap' issues which the Bank will be offering, especially as the flow of new money into the life and pension funds will be rising this year to over £9,000 million.
How do these short-falls in public spending come about? If only one could say that a minister in charge of one of the spending departments had refused to sanction a billion here or a billion there because it was a wasteful and extravagant project! But this is a very unlikely event. A more likely explanation is the muddle and delay which so often occur in the carrying out of a project and the• hold-ups in the delivery of the materials. Nevertheless I am convinced that a minister with a Gladstonian passion for economy could save a billion here or a billion there by just eliminating waste.
It has been suggested that the short-falls in planned expenditure have been affected by the cash limits which the Treasury imposes on certain services or blocks of services in the financial year, but I cannot see the logic of this if cash limits are translated into what is called 'out turn prices'. Cash limits, first imposed on military programmes, now cover over 60 per cent of voted expenditure, the exclusions applying only to 'demand-determined' items such as the social services. Is it likely that the cash limits will be strictly applied on the votes which have now been jacked up by an unreasonably big increase in wages? This would be a more logical 'stop' than a monetarist freeze-up of the money supply which in any case could not be specifically applied to a particular vote. The White Paper says that if the rate of inflation were to turn out substantially higher or lower than had been allowed for, 'they would take stock of the position'. They might have added 'in the light of the coming election'. Seeing that the Government intends to rush through a Bill to control or freeze prices — regardless of the effect on company profitability — we may assume that the light of the coming election will shine brightly on all their expenditure actions.
I hope that I am not being beastly to the Chancellor. I have said that he would have to abandon his old threat to sharpen his monetary and fiscal weapons to beat off a wage-cost inflation, for he would only be causing a slump which would destroy his revenues, but he is a fighter and might well say to his spending colleagues that he is insisting strictly on his cash limits. If he were as brave as his words he would come on the box and declare loudly that public expenditure must be cut and this White Paper torn up.
That would put the gilt-edged market into a buying mood.
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