A warning to Mr Barber
The Budget is a government's annual statement of ability to fulfil its promises and of intent to avoid them. The present Government came into office with a specific set of doctrines, a measured number of policies which, as the Prime Minister said at the first post-election conference of the Conservative Party, would produce the "quiet revolution," a "radical change in the style of government" and thus in the historical direction of this couhtry. Subsequently, the Government was brought back, without dignity or necessity, to the view that the exhausted socialist set of political and economic nostrums were appropriate to Britain's condition: instead of private enterprise we should have state enterprise; instead of free wage bargaining, we should have wage controls imposed by the state; instead of individual businesses being judged by their efficiency, we should have business judged by its capacity to provide employment.
Several influential backbench Conservatives have pointed out in recent weeks that the present level of public expenditure is not compatible with reducing inflation and with reducing taxation. It can only be sustained, given a determination to contain inflation, if Mr Heath and his colleagues abandon their commitment to lowering both the level and incidence of personal taxation. It is worth recalling that, when the Government presented its first mini-budget — in October 1970 — it consisted essentially of an attack on public spending, as a prelude to lowering taxation. The lowering of taxation duly came about, but the initially tight public purse-strings were soon loosened in response to high unemployment, the apparently chronic incapacity of some British industries, and the loss of nerve of ministers in the face of political pressure. Plainly the Government cannot go on spending money like a drunken sailor, while exhorting citizens to forgo wage and price increases and tighten their belts.
This Government has run into difficulties its members did not anticipate in the blissful dawn of June 1970. Some of its reactions to those difficulties have been laudable. At almost every point where its twin commitments to lower taxation and higher growth came under pressure from economic circumstances it tried to preserve them. When the Treasury gloomily insisted that the state of the nation could not bear tax cuts, and when the Inland Revenue swore that the cuts proposed were administratively impossible, Mr Barber went ahead nonetheless. When the partous state of sterling seemed to dictate deflationary measures, and an end to immediate plans for growth, the Government floated the pound. Unfortunately, the dilemma the nation now faces cannot be resolved either by the exertion of authority or by resort to tactical expedients, however good they may be in themselves. Inflation is caused by an injection of money into the economy in excess of the productivity of that economy; and the greatest single cause of this injection are decisions by the Government to spend and to create more money. It makes no difference what the money is spent on or why it is created: as long as expenditure in the public domain is not paid for by taxation, and as long as paper money is printed, Government activity will be inflationary. Since Britain spends a great deal both on social services and on nationalised industries, and huge sums now committed to industrial subvention, the consequence of expenditure must be either very much higher taxation, or continual runaway inflation. There is no choice in this matter; and although it may make political sense to blame inflation on the unions, it makes no economic sense at all.
What the Government can now do is limited by the policies it has adopted. The compulsory restraint on wages, combined as it is with a much less thorough attempt to restrain prices, makes it politically very difficult to go ahead with either the fair rents policy — which is designed to make public sector housing operate on a sound economic basis — or with any schemes to make the nationalised industries operate with due regard to economic realities. Indeed, the Prime Minister has already indicated that he intends to provide further relief from fair rents, and further restrictions on the rating powers of local authorities — in spite of the fact that the number of services they are expected to provide increases almost day by day — in the interests of his freeze. And no nationalised industry has recently departed from the presence of ministers with its begging bowl still empty. We can only conclude that, if the objective of a five per cent growth rate is not to be abandoned, and if, for political reasons, major reductions cannot be made in public expenditure, the only possible Budget must be based upon increases in direct or indirect taxation, though not any increase in the taxation of profits, since that would inhibit growth. But such a mixture would be distinctly unpalatable and unp,opular.
Short of some such major reversal of policy and ambition there remains however, something the Government could do. Most of the special public investment programmes undertaken by the Chancellor in 1971 and 1972 were planned to have a limited life, of two to three years. Because, however, so many programmes have been piled on top of one another, it is difficult to be sure that the initial undertaking to phase out Some elements in the public expenditure programme can be kept. It is therefore necessary for Mr Barber to include in his budget speech a clear indication of how order has been — if it has — brought into the expenditure programme. The Industry Act can be used to sanction enormous expenditure, but it is possible to administer it, because of the bureaucratic powers reserved to the Department of Industry, in a reasonably economic way. A commitment to do so, which will necessarily involve much less industrial and regional subvention, must be made by the Chancellor. Next, there must be indications of reductions in social welfare spending, and a greater switch to individual provision, in housing, health and social security. There must be no further subvention of nationalised industries. Such a package would be far from enough to halt inflation; but it would achieve a measure of reduction, and it would indicate that the Government's future plans could become sound. Otherwise there will have to be a serious deflationary package before the end of the year: and if there is, then the growth target, the objective of reducing taxation, and the Government's prospects of winning the next general election, will all vanish.
Previous page
