In the City
Investing and going abroad
Nicholas Davenport
First, I must thank the Chancellor for his Christmas card which revealed his delightfully impish sense of humour. It was a Giltray cartoon of 1806 showing two fat taxgatherers knocking at a demented householder's door — the poor taxpayer at the window crying out 'Taxes! Taxes! Taxes! How am Ito get money to pay them all? I shall very soon have neither a house nor hole to put my head in'. The bloated tax man answers: 'What the devil should you want with a house? Haven't you got a firstfloor room so live in? And if that is too dear can't you move into the garret or get into the cellar?' The inside of the card explained that Pitt's death had brought Fox and his friends back into power after twenty-three years in the wilderness and that notwithstanding their claim that Pitt's tax Policies had been excessive they quickly raised the property duty to 10 per cent. Coming just after I had read that Labour's wealth tax proposals were to be resurrected With the prime minister's blessing this mordantly funny card removed what little Christmas cheer was left. But it was good of the Chancellor to think of me and the Spectator.
The only consolation the taxpayer today has over his afflicted predecessor of 1806 is that he can remove himself abroad. He could not have done that in 1806 because there was a Napoleonic war going on. Pop stars, whose ill-deserved incomes exceed £1 million a year, are, in fact, forced to go abroad because the Chancellor here would leave them with only 2d in the £. They — and less rich but more deserving citizens — have lately been encouraged to do so by the relaxation of exchange controls recently agreed with the EEC. Families emigrating from Britain to the EEC will now be able to take out £80,000 instead of £40,000. (If the children only have emigrated they can receive wedding presents of £7,500 instead of £3,600.) I have no intention myself of emigrating — do you really know of a 'better hole'? — and I have advised my grandson to wait and see. Under the treaty of accession to the EEC all exchange controls had to be
lifted by the beginning of 1978 and the lifting has now been extended only to the beginning of 1979. This enlargement of the freedom of movement is to be cherished. If ever the Marxists were to take over we shall be as confined to our national prison walls as the poor Russians are today.
The hysterical Marxists have already been screaming that this relaxation of exchange controls is a wicked encouragement to businessmen to invest more abroad instead of at home. This Marxist illusion must be exposed here and now. Direct investment abroad is usually financed by retained profits or by borrowing abroad. A business can apply to the Bank of England for £250,000 or 50 per cent of the cost of the investment at the normal rate of exchange if it can show that it will recoup the cost in eighteen months.
(The new relaxation for the EEC is £500,000 and three years for recoupment.) As the recoupment provisions are considered almost impossible to observe direct investment abroad will continue to be done out of retained profits.
But the more hysterical Marxists are now claiming that the Government is also encouraging portfolio investment abroad by abandoning its 25 per cent grab of the investment dollar premium. This is non sense. To understand why, I must briefly explain the complicated rules about buying foreign securities. We can't buy them through the official sterling exchange mar ket. We have to raise a loan in foreign currencies or go to the so-called investment dollar pool which contains the dollars com ing from the sale of foreign securities by other UK portfolio investors. This is a nar
row market and the pool dollars always stand at a premium over the official rate. (The premium presently is 40 per cent and was as high as 90 per cent in 1975). What
has been upsetting the portfolio managers is that the Bank has been grabbing 25 per cent of the premium dollars whenever they sell a foreign security in the pool, leaving them only dollars at the official rate. The grab was initiated by the 1964 Wilson government and produced a useful addition to our then depleted reserves of around £100 to £200 million a year (the highest grab was £265 million in 1974). Now that our reserves
are now over £11 billion — over $20 million — there was obviously no reason to continue
the outrageous premium theft. It was always barefaced robbery and it discouraged proper management of portfolios, as the Bank of England now admits. Indeed, the Bank has disclosed that the premium grab was responsible for the reduction of £14 billion in our portfolio holdings between end-1964 and end-1976.
While the removal of this socialist grab need not encourage greater portfolio investment abroad — Wall street is still a bear market and likely to remain so while President Carter's face, when not grinning, suggests that the job has really got him and the dollar down — it may enable the market in gold and mining shares to return to London. The market here was lost when the government in 1972 made the currencies of the old sterling area subject to the same controls— including the 25 per cent grab — as foreign securities. Our 'invisible' income from abroad may even increase if the London brokers succeed in getting this market back. I wish them luck in the new year.
What I am now trying to impress upon socialist readers of this column is that our 'invisible' income from abroad has saved our bacon and that investment abroad is to be encouraged as long as our workers remain uninterested in improving industrial productivity which might increase our share of world trade. The excess of our imports over exports since 1973 has been running at between £24 and £3i billion a year. (It was only recently that we.had two months when exports exceeded imports). The receipts from Invisibles' — financial and other services plus interest and dividends from investments abroad — have helped to meet the bulk of this deficit and to keep us viable as an international trading nation over the past years. Now by the grace of God we are going to run into a huge surplus on our balance of payments — estimated at over £4 billion by 1980— by reason of North Sea oil, but this must be regarded as another bonus from investment abroad. It does not stem from our performance on the workshop floor.
A final word on economics for those trade union bosses, especially those leaders likely to become Companions of Honour. When they have learned the economics of viability for a world trading nation they will appreciate that the bonus from the North Sea oil (investment abroad) must not be dissipated in a consumption boom but used to develop new forms of export trade which can arrest the decline in our share of world trade. This will require close co-operation between the industrial 'work force and its managers. If co-operation fails the managers will take advantage of the relaxation of EEC exchange controls by emigrating to the Continent where they will find jobs at double their present salaries. When will the trade union leaders wake up?
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