'BELOW-THE-LINE'
By NICHOLAS DAVENPORT
'Below-the-line' is not, of course, an accurate or even an intelligible account of capital spending in the public sector. Over the last ten years there has been quite a change in these capital payments, the significance of which the Treasury tried to explain—not very successfully—in its last Bulletin for Industry. Under the Labour Government loans for local authority housing and war-damage pay- ments made up a large part of the total. In 1955 the local councils were told to go away and bor- row on the open market if they could, and in the 1956 Budget the nationalised industries were taken off the market and financed directly by the Exchequer. The effect of this illogical decision was to put up the cost of social investment in housing, roads, drainage, sewerage and other amenities without bringing about any reduction in the total net payments 'below-the-line;.which have, in fact, increased from £391 million in 1953-54 to £635 million in 1957-58. It is high time that the Treasury attempted to draw up a proper all-inclusive capital account for the public, sector —quite independently of the cash account Budget —and bring it into a general estimate of the total national savings and investment.
It is this equation of savings and investment which is all-important in the avoidance of infla- tion, not the meaningless over-all Budget surplus or deficit. By law any surplus of receipts over payments 'above-the-line'' in the Budget has to be devoted to the redemption of debt, and for this reason this surplus is conventionally applied to the reduction of the deficit 'below-the-line.' If there is any remaining deficit over-all, it is a mere formality expressive of nothing but the in- adequacy of the national system of capital accounting. Yet how many people ignorantly point to the over-all Budget deficit as a sign of inflationary finance? How many 'sound money' champions cry out for a permanent over-all surplus to squeeze inflation out of the economy? The truth is that in certain circumstances an over- all surplus. could be inflationary while an over-all deficit could mean a reduction in the national debt.
. Let us therefore put first things first. To avoid . inflationary finance the Chancellor has not only to make sure that the total national savings are likely to be equal to the total national investment, but he must take steps to see that his estimate of the total national demand (in money terms) is not in excess of the estimated available supply of labour and resources. As the economy at the moment is free of 'demand' inflation—with an insufficiency of demand clearly indicated by 2+ per cent. unemployment and a surplus capacity in most industries—it is permissible for him to take some risks in the disposal of tax reliefs. But I repeat that it is also necessary for him to increase his capital spending and I, for one, will be very disappointed if his over-all deficit is not consider- ably enlarged.
Last year the 'above-the-line' surplus (i.e., forced savings) was £377 million and the over-all deficit was £222 million. ]f the latter rises this year to over £400 million, as it did in 1952-53, it would have to be financed not only by the usual funding operations through the 'tap,' but by the issue of more Treasury bills. This would be a great bles- sing, for it would carry with it an increase in the supply of bank money which could lower interest rates. In the past eight years the supply of bank money has not kept pace with the increase in the net national income and consequently we have had a high long-term rate of interest. As Professor Paish demonstrated in a recent article in The Banker, the net national income rose by 55 per cent. between 1951 and 1958, but the quantity of bank net deposits and note circulation by only 15 per cent. The'supply of bank money has never been so restricted for over thirty years. The result has been that when the banks had to increase their advances recently to allow for the expansion of hire-purchase finance and the extension of per- sonal credits—all in accordance with the Govern- ment's policy of re-expansion—they had to sell investments. And the Treasury had to take up most of their sales, in order to avoid a break in the gilt-edged market and a rise in the already high long-term rate of interest. It was quite a muddle and I expect Mr. Amory is anxiously waiting for the Radcliffe Committee to report in June and make recommendationS for a more sensible monetary policy.
Three years ago there was much alarm among the bankers about the excessive quantity of Treasury bills which Sir Oliver Franks described as 'the modern equivalent of the printing press.' Since then the floating debt has been reduced and the supply of bank money has been more than ever restricted. The effect has been to keep the long-term rate of interest around 5i per cent. An increase in the supply of Treasury bills now would allow the banks to expand both their investments and their advances and the expansion of their investments would bring down interest rates and help the economic recovery. I therefore beg Mr. Amory, when he increases his capital spending 'below-the-line,t to see that the supply of bank money is made adequate for the job of re- expansion.
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