U.K. Fiscal Policy Analysed

Press, Volume CVIII, Issue 31579, 17 January 1968, Page 6

U.K. Fiscal Policy Analysed

(N.Z. Press Asin. —Copt/rlght) LONDON, Jan. 15. The central aim of British fiscal policy for the next two years was the production of significant surpluses in the balance-of-pay-ments, John Mi Lee, of the “New York Times” News Service, reported.

He Mid that priority was so great that the Labour Government had promised to cut defence spending, reduce its capital investments, reappraise once sacrosanct social services, freeze consumer spending, divert national growth to exports, permit higher prices and appeal to unions to forgo pay rises. Such extraordinary measures are considered necessary to make the • forced devaluation of November 18 a success, and put Britain’s economic house in permanent order. Mr Roy Jenkins, the new Chancellor of the Exchequer, who has the job of producing such an achievement, warns that the process “must take time to bring its results.” “It would be too optimistic to look for a sudden surplus

in our balance of payments in the first half of this year,” he said in a statement. PATIENCE, TOO Cautioning that the surplus would only begin to show in the first half of the year and reach fruition in 1969, he said: “We therefore need patience as well as confidence.” However, the failure of the Government's economic policy of the' last three years, culminating in the devaluation that it had pledged to avoid, has drained confidence. The Prime Minister (Mr Wilson) personally suffers from low esteem. Devaluation must therefore not only work, but be seen to work, if the pound is to command support. Another cut in parity would almost surely bring down the dollar in self-defence,' and probably precipitate a severe world trade contraction. ENORMOUS STAKES The stakes on Britain’s success are thus enormous. After a balance of . payments’ deficit independently estimated at $NZ642,859,200 in 1967, the Government is talking of SNZ2SOm in the last half of this year and SNZIO7Im “improvement” by 1969. This implies a JNZ357,144,000 surplus. However, yean of such surpluses are required for Brit-

ain to pay back the heavy international loans incurred in the vain effort to maintain sterling’s former value. The gross national product is expected to climb by more than 4 per cent this year after a 1.75 per cent gain in 1967, but this overall Improvement is futile unless it is exportoriented, to produce a surplus of money flowing into the country. LIVES BY TRADE Britain lives by trade. Domestic agriculture produces only half the food needs; there are few raw materials. Much must be imported and paid for by exporting manufactured goods and by exporting services. These exports in 1966 covered 95 per cent of the import cost, but Britain’s balance of international payments is thrown into deeper deficit by two special situations. The first is Government overseas spending for military commitments and economic aid in Britain's expensive role as a world power. The second is the interest payments on sterling balances held in London in bank deposits and securities for reserve, trading and Investment purposes. PRECARIOUS These balances also create a

precarious financial position, since they can be freely sold at times of waning confidence —or at any other—for gold, United States dollars or other currencies. Britain’s reserves to redeem this sterling amount to less than a quarter of the balances outstanding. Such selling ensued last year when Britain’s deficit persisted, in spite of a series of redressing efforts, notably the recession-producing wage freeze and economic squeeze of July, 1966. But even this severe policy failed to dampen imports or encourage exports sufficiently. OVER-VALUED There were many extraneous circumstances that worsened the situation—dock strikes, the Middle East war, a slow-down in world trade, more attractive interest rates on United States dollars. Yet the trade balance went sour months before Suez was closed, and imports contained increasing amounts of engineering goods in which Britain normally excelled. Clearly the pound was overvalued, and a massive wave of selling engulfed foreign exchange markets as investors sold oitright, traders hedged and speculators sought quick profits.