Too Clever By Half
Asan exercise in confounding the press, bamboozling the Opposition, and rais- ing taxation without anybody apparently minding, Mr Callaghan's latest and most extraordinary budget to date can be accounted an unequivocal success. It is not, however, on these grounds that the SPECTATOR proposes to base its judgment. Our verdict must be guided, first and fore- most, by what the 1966 budget has done to strengthen Britain's balance of payments. For the truth—and there is no point in hiding it—is that, after over a year of in- dustrial stagnation, we are still heavily in the red, we still owe getting on for £1,000 million to the overseas bankers, the trade gap so far this year shows no improvement on 1965, and nobody any longer pretends that we have a chance of keeping our solemn international pledge to break even by the end of 1966.
The 'budget attempts to deal with this in three different ways. The first is the traditional method of deflation. Largely as a result of the so-called Selective Employ- ment Tax, which the Treasury hopes and believes will in the main be passed on in increased prices all round, the Chancellor's advisers expect the budget to take some £200 million a year of purchasing power out of the economy. This, as usual, is ex- pected to reduce the demand for imports and to free resources for exports. The chief effect of the SET, in other words, is to enable Mr Callaghan to replace orthodox stop-go by unorthodox stop-go.
It is difficult to feel that this is much of an improvement. The nation is once again condemned to prolonged stagnation and quite possibly recession; to a fall in industrial investment that will prejudice our chance of faster economic growth in the future; and to an ephemeral improvement in imports that will reverse itself as soon as the economy starts expanding again. More- over, this latest deflation seems' peculiarly otiose and ill-timed: there are already straws in the wind to indicate that the economy is now on the turn, and that the pressure on the labour market is beginning to ease as a result of the measures in Mr Callaghan's earlier budgets. If this is so, the SET, which perversely does not take effect until September, may well simply give a further push to an economy already by then sliding downhill. We have indeed been here before.
The second way in which the budget sets out to improve the balance of payments is by direct action on capital exports and government spending overseas. The proposal to ask for voluntary restraint on private investment in the developed coun- tries of the sterling area is both sensible (in our present straitened circumstances) and belated. But this is only expected to save, at the very most, £50 million a year of foreign exchange. In addition, the Government hopes to save a further £50 million by persuading our NATO allies to meet the full foreign exchange costs of British forces in Germany. Since we have repeatedly failed to achieve this in the past, there is little reason to expect success now. After all, having nailed our flag to the NATO mast with such (misguided) funda- mentalist fervour, we can scarcely no* threaten to withdraw our troops if we fail to receive financial satisfaction.
But whatever the total benefit to the balance of payments from the 'direct action' proposals in the budget, it is clear that this will be completely overshadowed by the damage done by the removal of the import surcharge in November. The Board of Trade's own estimate is that this will increase our import bill by some £150 million a year. It is true that over the next six months there may actually be some slowing-down in imports, as buyers wait for the surcharge to be removed; and to a Prime Minister who has proclaimed that 'in politics a week is a long time,' this may seed' a very clever trick indeed. But to those able to look as far ahead as 1967 the out- look for the balance of payments is a sombre one.
Nor is this judgment invalidated by the budget's third way of attempting to benefit our external accounts : the nature of the new SET. Recognising that the key to our predicament is that British goods are un- competitive in world markets, Mr Cal- laghan, as we know, would have liked to have remedied this by giving overt export subsidies. But, alas, this would be contrary to the rules of GATT. So the Chancellor —or, to be more accurate, Mr Kaldor—hit on what at first sight seemed an ingenious second-best. Since manufacturing industry, with less than 40 per cent of the total national workforce, provides the vast bulk of our exports, why not (it was reasoned) provide a subsidy not to exporters (which would be illegal) but to manufacturers (which is allowed)?
No doubt Mr Kaldor, who knows what he is about, originally proposed a subsidy. of worthwhile proportions. But as it has emerged from the Whitehall mangle, it is simply a joke. The total amount of subsidy tor 'premium') payable to manufacturing industry is £135 million a year. Since the SET will involve manufacturers in paying more for services, their net benefit will be reduced to some f100 million a year, or little more than half of one per cent of manu- facturers' total costs. And even this miser- able subsidy will then be subject to corporation tax at 40 per cent. Some incen- tive! In a sense this is just as well. since the method proposed is the worst possible kind of subsidy imaginable. But it is all too likely that, by flouting the spirit (although not the letter) of the GATT treaty, the Government has succeeded in losing all the international goodwill that might otherwise have been gained by the abolition of the import surcharge and has made it almost impossible for us to impose a really worthwhile export subsidy later on.
It is true that the Chancellor's advisers hope for a further long-term benefit to ex- ports as the SET leads the service and con- struction industries to release manpower that can then be snapped up by manufac- turers. But quite apart from the fact that this is obviously a long-term development of no relevance to our immediate balance of payments crisis, it contains two basic fallacies. The first is to suppose that because an • increase in exports requires, ceteris paribus. an increased labour force in manu- facturing industry, it follows that an in- creased labour force in manufacturing will mean increased exports. It does not. And the second fallacy is the belief that it is a shortage of manpower that is responsible
. . and next time you have a hot tip, keep it to yourself !'
for our inadequate export performance. It is not. Uncompetitiveness is to blame.
On the fundamental and inescapable criterion of its likely impact on Britain's balance of payments, then, the budget fails. But what of the SET itself? For a nation that desperately needs a more economic use of its manpower, a tax on employment is obviously a step in the right direction, even though a crude poll tax (as this is) is demon- strably inferior to a proper payroll tax levied as a percentage of a firm's total wage and salary bill. It is also plainly sensible to broaden the base of taxation—as this tax does—by bringing in the service indus- tries which are unaffected by purchase tax and the excise duties.
But what cannot possibly be defended is the payment of an employment premium to manufacturers—as officially and somewhat arbitrarily defined by the Government. The distortions and anomalies that this proposal, if implemented, will introduce into British' industry and the British economy beggar belief. Nor is this all. For even if it is felt necessary to provide manufacturing indus- try with a subsidy, and if the GATT rules exclude, a subsidy geared to exports, it would still have been possible to have made the payment on the basis of turnover or even capital investment. To pay the pre- mium on the basis of the number of men employed, when manufacturing industry's besetting sin is the wasteful use of labour, is outrageous. No sophistry can demon- strate that if it is right to levy a payroll tax on one sector of the economy it is also right to pay a payroll subsidy to another sector. This is plain nonsense.
The 1966 budget, as Mr Maudling points out on another page, does nothing whatso- ever to provide incentives for the individual.
-; It even removes them, although the elimina- tion of the stock option device may at least focus attention on what is really wrong with personal taxation : the unacceptably high level it reaches. It has introduced a new tax, the SET, which, although not wholly misbegotten, has been proposed in a form that is so clever that it defeats itself—at goodness knows what cost to in- dustrial and economic sanity. Above all, the budget does nothing to solve the over- riding problem of the balance of payments. As November, and with it the date for the removal of the import surcharge, looms closer, the pressures for yet another defla- tionary autumn budget to strengthen the dykes are bound to be heard. The whole sorry business is an object-lesson of what happens, in a classic devaluation situation, when a government resolutely refuses to face the facts.
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