In 1980, a year into Margaret Thatcher’s first term in office, unemployment was nearing three million and both interest rates and sterling were high. The government, said Peter Kellner, had “created an old-fashioned depression” and he predicted a series of U-turns in economic policy. He looked at the aims of the Confederation of British Industry (CBI) and its lobbying for various changes to National Insurance rates and oil surcharges, as well as to interest rates, and foresaw that, if granted – and he thought they would be – “in return the rest of us will pay higher prices and higher taxes”. How the government would do that was unclear, but Kellner predicted some finessing of income tax rates and VAT to recoup the billions that would be lost to enable industry to get its way.
I smell a U-turn in the air. That is not to say a U-turn will happen: there is many a slip, better known as John Biffen [then chief secretary to the Treasury], twixt cup and lip. But if there is a U-turn between now and next spring, it is now possible to identify what form it will take. It will come in easy stages, each one presented as no more than a mid-course correction, but cumulatively transforming a central feature of the government’s economic policy. Their components will be a cut in interest rates, a fall in the value of the pound, and a reduction in some of the charges levied on industry (like the National Insurance surcharge). Their overall impact will be to arrest, or at least ameliorate, the decline in industrial profits; in return the rest of us will pay higher prices and higher taxes. It will be a U-turn that helps companies at the expense of consumers; it will have practically no impact on the level of unemployment.
The point is that there are U-turns and U-turns: those that reverse the whole direction of government policymaking, and those that merely send some of the passengers on a more comfortable route to oblivion. It is the second that the government is now contemplating, in such a form that the first will be delayed for even longer. The text for the next few months comes from the handbook of next week’s Confederation of British Industry (CBI) conference resolution: “This conference supports the government’s strategy in making the defeat of inflation its top priority, but draws attention to the damage being done to the country’s industrial and commercial base and profitability and employment by the high value of sterling and high interest rates.”
For some time the CBI has been shaping up for a quarrel with the government. In its paper to the September meeting of the National Economic Development Council, the CBI wrote: “It is crucial to relieve the current financial pressures on companies so as to preserve the industrial base and provide the best possible foundation for resumed long-term economic growth… Many companies now feel that the government must show a greater awareness of the difficulties which the high pound is causing for our industries.”
Last week, the CBI published its “blackest ever” survey of industrial trends. According to Sir Terence Beckett, the CBI’s new director-general, “we have not touched bottom yet. There is worse to come.” What the CBI wants is a package of measures that include: a cut of 4 per cent in interest rates; a lower value for the pound; abolition of the National Insurance surcharge; abolition of all local rates paid by the manufacturing industry; an end to the four-month delay that the government has imposed on the payment of Regional Development Grants; and the abolition of the duty on heavy fuel oil.
All told, these measures would save industry at least £7bn a year. Or, to put it another way, most of that would have to be paid for in higher taxes from the rest of us – say, by raising the standard rate of income tax to 38p in the pound, or putting VAT up to 25 per cent. The government, of course, will not do all that. But it may do some of it – for example, halving the National Insurance surcharge, and paying for it by adding 2p to the standard rate of tax. More to the point, it is likely to bring interest rates down – though not as fast and far as the CBI would wish.
The CBI’s case on interest rates is this. At present, high interest rates are hitting industry two ways: by making borrowing more expensive (especially for companies that are now in difficulties, and have to borrow to stay alive), and by making the pound an attractive currency for foreigners to invest in. If interest rates fell, borrowing would be cheaper, and the pound would be less attractive – and so would lose some of its value, giving British companies a better chance to compete against foreign rivals. Ah yes, but are there not problems, if you accept the government’s monetarist credo? Did not Sir Geoffrey Howe tell MPs last week that monetary growth was vastly overshooting the government’s target – with the implication that any sharp reduction in interest rates would push money supply even further out of control? And do not this week’s figures showing money supply up 2 per cent in four weeks prevent any chance of an early cut in interest rates?
The CBI’s response is to the effect that these problems lie in the past – money under the bridge, old boy – and that over the next few months money supply will grow only slowly. So a sharp cut in interest rates will be possible, within the government’s future money supply targets.
Which brings us to the nub of the issue. When CBI members meet in Brighton next week there is bound to be considerable aggro, with critics of the government’s tactics on one hand, and critics of the CBI’s fainthearts on the other. But, with the possible exception of a few delegates from the north, all they will be debating is tactics. Few in the CBI are ready, despite the CBI’s own bleak picture of its members’ plight, to challenge the government’s monetarism head-on. A more useful litmus test than interest rates is inflation rates, and the retail prices index shows that prices directly influenced by government policy have risen twice as fast in the past year as those that are chiefly determined by the private marketplace.
To a monetarist, these figures show that the government’s prescription is working. Inflation in the private sector is now relatively modest by the standards of the mid to late 1970s. And if public sector pay and government borrowing can now be contained, then mortgage rates will fall, nationalised industry prices and rates can be contained, and the duty on drink and tobacco need not rise too fast. That is what the CBI, like the government, maintains. There is an alternative way of looking at the figures, however. While it is true that public sector pay settlements have been higher than private pay deals (offsetting the years of pay policy when the public sector stuck to the rules while the private sector did not), that only explains part of the government-induced price-rise. Higher mortgage payments, rates, council rent, public transport and energy prices, have all been exacerbated by higher interest rates and/or tight cash limits. High inflation in these sectors has happened because of monetarism, not despite it.
But what about the private sector – hasn’t monetarism kept inflation down? Up to a point, Lord Copper. Because the pound is high, imports are cheap. And because of the recession, profit margins have been squeezed. The forces that have kept private sector inflation to 12 per cent are precisely those forces of which the CBI is now complaining.
So what the government has ended up doing is this: it has created an old-fashioned depression that has separately but simultaneously crippled private industry, nationalised industries, and employment prospects, and kept overall price inflation at historically high levels.
The CBI would not need to be fearfully left-wing to point this out. But at present its voice is a grating mixture of plaintive squeals and special pleading. It is in danger of being dismissed by the government as well as the unions as being no more than a cynical interest group. This may not surprise many NS readers, but to my mind, when Britain has a Tory government and unemployment is spiralling towards three million, it is actually rather a pity.
Read more from the NS archive here. A selection of pieces spanning the New Statesman’s history has recently been published as “Statesmanship” (Weidenfeld & Nicolson)
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