ECONOMIC POLICY

The Chancellor's cruel dilemma

JOHN BIFFEN, MP

What is Mr Heath offering apart from a new style of government? The weeks have now lengthened into months, and the pattern of this administration has now become more distinct. Indeed it should. Governments have a valuable span early in the lifetime of a Parliament when new policies and directions are expected. Thereafter the habits and the inertia of continuing administration narrow the options.

The economic policies that will sustain this Government rest heavily on the assumption —some would say hope—that a Tory Chan- cellor can find some happy connecting theme between higher levels of savings, more rapid and sustained growth in domestic output and greater price stability. The philosopher's stone which will enable those prized objec- tives to proceed in parallel is a substantial cut in direct taxation and a modest recasting of total taxation so that it bears more on the public in their spending rather than in their earning capacities. The Barber autumn bud- get was an earnest of this intention.

At the same time there are three supporting policies. A determined effort is being made to cut back on public expenditure, most sig- nificantly by replacing investment grants by faster tax depreciation rather than by invest- ment allowances. Secondly there is an at- tempt to provide a more stable climate for collective bargaining and set some limits on the legal immunities of those engaged in in- dustrial disputes; and finally there is with- drawal from the direct involvement of the state in industrial affairs, particularly through bodies like the IRC or some of the diversified activities of the nationalised industries.

The Government believes that these pol- icies will result in a much greater sense of realism and toughness in our commercial and industrial life. The somewhat unexpected

lessons that are being taught the -luckless Mersey Docks and Harbour Board have

clearly made an impact on the business world. Whitehall is no longer good for an easy touch as banker of last resort to some hard luck but winning story about ultimate triumphs in technology or import savings or regional development. Nonetheless there remains an area of opaqueness in govern- ment policy, and final judgment must be suspended until more is known of the Chan- cellor's attitude to monetary policy, not- withstanding the disquieting speech he made to the Finance Houses Association.

Mr Barber is perfectly entitled to reticence on this subject, but the budget, in a few weeks' time, will be the occasion after 'which his Trappist arts will become self-defeating. Indeed the financial statistics accompanying the budgetwill reveal at least something of the Chancellor's policy. Radical Tory judg- ment on the Government's economic strategy will turn substantially on the belief that the 'money supply'—created by the government —holds the key to inflation, and the parallel instinct that current high levels of public spending are in some way linked with the increase in that 'money supply'—or domes- tic credit expansion, to use the Treasury glossary.

The Tory Radicals would like to see a transformation in economic policy and think- ing similar to that contrived in the budgets of Lord Butler when he was Chancellor of the Exchequer in the early 'fifties. Will this hope be realised? This must turn on the extent to which the present Treasury Bench feel committed at least to much of the sub- stance of the arguments of Professor Fried- man. There is a good ease to be made demon- strating that they do; trade union law re- form, modest reductions in public expend- iture, less `dirigiste' action by Whitehall; even some kind of embryonic reverse tax scheme

in the Family Income Supplement Act—all

bear some imprint of the Chicago school of economics. Indeed these policies—and more of the same (particularly reducing public ex- penditure) could be indispensable for the success of monetary policy.

Tory radicals, however, don't just want the trimmings; they want the turkey as we'll.

A monetary policy, of course, would almost certainly lead to some disorderliness in the gilt-edged market, and in certain circum- stances could make some domestic interest rates particularly attractive to large volumes of footloose foreign money. Friedman has argued that a floating exchange rate is the necessary antidote to this situation.

The Chancellor's dilemma is cruel. If he accepts the logic of Chicago-style policies his use of monetary measures requires free exchange rates, but if he rejects the updated tenets of classical liberalism he will gradually and unwillingly be forced to resort to the variety of interventionist policies that are still tarnished with recent failure, and inspire no hope or confidence among younger Tory sm.

What then are the factors leading the Government to set its face so severely against a floating exchange rate—or even a modified but more flexible variant of the present system? The answer seems to be that it would be such a deliberate and unilateral act against the letter and spirit of the in/F. Everywhere it would be construed as a piece of British Gaullism that made this country quite unsuitable for the tightly organised in- ternational.alliance we are seeking to join— namely the EEc. Indeed it would be unthink- able for Britain to join the EEC without interlocking her exchange rate on fixed terms with the other Common Market currencies. The question therefore merges into the wider issue of the extent to which the Government is holding back on the seeming logic or con- sequences of its economic policy in order not to prejudice negotiations in Brussels.

The temptation to weary in prudent econ- omic welldoing is great; and seems most re- cently to have been unhappily demonstrated by President Nixon. No one believes the cur- rent economic policies of the Government will prove particularly glamorous in the first half of this Parliament. The cure for inflation brings short-term discomfort for the public and brickbats for the politician. The prizes are there, nonetheless, for an administration with the stamina and certainty of purpose to last the electoral course.

In this context quite clearly British mem- bership of the Common Market is of far greater significance than the latest round in the postwar battle to discover some golden mean that will maximise both price stability and economic activity and employment. Even so, many Tories, and others besides, feel that the nation-state remains the most natural and viable unit for the purposes of domestic government and international co-operation. They will hope the current courtship with the EEC will be short and unsuccessful but without hard feelings. Above all they will be fearful lest protracted considerations of Common Market policy deflect the Govern- ment from the vigorous pursuit of a dom- estic economic policy designed to re-estab- lish price stability.