MR CALLAGHAN’S BUDGET DELAYED REACTIONS ARE BEGINNING TO SHOW VP

Press, Volume CIV, Issue 30739, 1 May 1965, Page 14

MR CALLAGHAN’S BUDGET DELAYED REACTIONS ARE BEGINNING TO SHOW VP

(By

RICHARD DENMAN

of tht ••Economist.")

(From the "Economist” Intelligence Unit.)

Mr Callaghan’s Budget statement on April 6, lasting over two hours, drew comparisons with the marathon performances of the gre • century master himself, Mr Gladstone. By the time the Chancellor Exchequer sat down a good many members of Parliament were ob\ o s , numbed by the sheer volume of the most complicated budget statement that many of them had ever heard. Their numbness was reflected in the City of London and also in foreign capitals which had been awaiting 1 i Callaghan’s performance before passing judgment on sterling. In iact it is only now that the delayed reactions are beginning to show up.

Thus, the London Stock Market brushed aside the gloomy first commentaries of the financial writers, and staged a substantial 14-point rise in the three days following the budget. It was not until the big institutional investors, and also the private operators, had had time to pore over the corporation tax and the disincentives to foreign investment during the weekend that the selling began. Even then investors did not seem to wake up to the extremely bleak implications, for the British oil companies, with their vast overseas operations, until the chairman of British Petroleum himself pointed them out on Tuesday. Exchange Markets The suspension of judgment in the foreign exchange markets has been even more prolonged. On the morrow of the Budget the pound hardened satisfactorily, and first comments from Zurich and Frankfurt and Brussels were just about all the Chancellor could have wished for. But since then there has been no real access of strength in either the forward or the spot markets; and the best that can be said is that the March trade figures—which were a good deal less rosytinted than the Board of Trade tried to make out—were shrugged off with only fractional losses. The truth is that the Chancellor has taken some pretty substantial risks. Only time will show whether he has pulled them off. The first test will come next month, when Mr Callaghan has to raise fresh finance from our international creditors. The substantial increase in taxation ought to stand him in good stead. But the creditors are less happy about the failure to cut Government expenditure, apart from the TSR 2; and being mostly central bankers, they tend to get impatient with the “social justice” aspects of the Budget—capital gains and corporation taxes. Significantly, enthusiasm for the Budget was distinctly muted in Paris. Test In Autumn? Nevertheless, it does look now as if the May borrowing operation is in the clear. The real test for the pound may come in the autumn, when seasonal pressures are always strongest against sterling, and when this year the war of nerves between the franc and the dollar —of which the pound is the principle helpless victim—is likely to reach its height. Much will depend on the extent to which specu-

lators feel constrained to unwind the big “bear” positions which have been maintained ever since last November’s crisis as the summer wears on. Of this unwinding there is still no sign; when—or whether—it comes will in turn depend on the progress of Britain’s visible trade. The May returns, to be announce! in mid-June, when the first impact of the cut in the import surcharge from 15 to 10 per cent at the end of April will be seen, will be the ones to watch. The second big risk which the Chancellor has taken is with the British companies which conduct much of their business abroad—and particularly the oil companies. Mr Callaghan's calculation is obviously that because these companies are British-owned and managed, they will stay put whether they like it or no. BP, being Governmentcontrolled, is unlikely to have much choice. Btrt Royal Dutch-Shell may very well decide to carry out threats which are already emanating from the city, and gradually transfer its operations beyond the Chancellor’s tax net. If this should happen, and if at the same time BP’s forecast that it is now going to be intolerably squeezed by its foreign competitors proves justified, the Government could find that it is losing more in terms of overseas oil revenues and sterling sources of oil than it is gaining by discouragement of overseas investment. Business Confidence But perhaps the biggest gamble which the Chancellor has taken is with business confidence. The full effect of the corporation tax on company earnings will not be seen until next year. But the Stock Exchange may be expected to discount this effect and also the impact of the capital gains tax on insurance companies

and other Institutional investors, well in advance. Government spokesmen have countered suggestions that the corporation tax. by discriminating against distributed profits, would lead to what Opposition speakers called “survival of the fattest” by pointing out that changes in tax arrangements have not, in the past, led to any significant changes in the extent to which companies rely on retained profits, and on money-raising operations in the market. They do not seem to have realised that if this argument holds good, then it follow’s that lower prices and higher yields in the Stock Market resulting from the budget will make investment and expansion very much more difficult. Small Safety Margin In the last analysis the final judgment on this budget, as on any other, will no doubt rest on the correctness of the Chancellor’s assessment of the evolution of home demand. But Mr Callaghan has narrowed his own margin of safety. Any indication that demand had not been sufficiently restrained could lead to fresh pressures on the pound, which next time could only be checked by a further massive—and certainly unnecessary—dose of deflation, or devaluation. On the other hand, if the squeeze turns out to be excessively severe, a deflationary slide has probably been made more difficult to reverse by the Budget. For in the unhappy frame of mind in the Stock Market induced by the Budget it would not take much bad news from industry to set off a chain reaction. Generally speaking. Labour governments are as vulnerable to the ill-will of the bankers as Conservative governments are to the ill-will of trades unions. Is Mr Callaghan going to be the exception which proves the rule?