Thatcher already 'blown off course’?

Press, 29 August 1980, Page 12

Thatcher already 'blown off course’?

By

WILLIAM KEEGAN

in the “Observer,” London

“They told us their monetary policy was going to produce painful side-effects? We’ve got the side-effects. But where’s the policy?” .. This sardonic comment by a company director earlier this month is one of the more polite of recent reflections .on the. British Government’s economic management. As the motor industry goes on to short time, and the tide of recession sweeps rapidly from the North, Scotland and Wales to the Midlands and the Tory heartlands of the South-East itself, the doubts about current economic policies are proliferating fast — not least among those who thought they were fully behind the policies. It was always conceded that the Thatcher/Joseph/ Howe experiment would detonate a few explosions before the technicians caught sight of the elixir. What was not foreseen by even the most cold-blooded of the experimenters was that the explosions would be so Loud and the elixir so chimerical. The unspeakable truth is that after a mere 15 months the experiment has almost certainly failed; in -my opinion it is a matter of months how before Ministers begin resorting to navigational metaphors about being “blown .off course.” It is quite something for a Government to boast selfsufficiency in oil and simultaneously preside over a level

of unemployment not only higher than anything seen since, the 1930 s but also continuing to rise at a rate unheard of in post-war Britain. Many people, despite their nervousness, were prepared to suffer’this in the name of the longer-term good that would allegedly come from defeating inflation — a victory which, they were told, ' would follow naturally from the central plank of the Government’s economic policy: strict control of the money supply. The latest monetary figures, however, have made complete nonsense of this central tenet of the Government’s policy. To have to endure a deepening recession as a result of strict monetary control would be one thing. To head for a slump without any signs of monetary control — indeed, the evidence is of just the opposite — qualifies for Lady Bracknell’s definition of carelessness. It may reasonably he asked that if monetary policy is not tight, why then are we in recession? The answer is that the economy is suffering increasingly from an oldfashioned deficiency of “demand.” As inflation has soared, . the growth of people’s “real disposable income” (what is left in their pockets after tax and price increases) has slowed down sharply. This would in any case affect the demand for British goods. And the slow-

down in other countries as they adjust to higher oil prices means that domestic sluggishness is hardly going to be made up for by extra export demand. Most important of all is the effect of the strong exchange rate. British manufacturers have suffered a 30 per cent loss of competitiveness in the past 12 months as the result of the combination of- a continuing large rise ?n their costs and a rising pound. Instead of being reflected in a depreciation of the currency (so that its external value reflects its internal depreciation) the pound has soared, as every tourist and buyer of imported goods is fully aware. The combination of these two factors has had a devastating and unprecedented effect on the ability of British firms to compete not just abroad but also at home. The rise in the pound has been rationalised by the Government as the inevitable result of “market forces” operating on a currency with “petro-currency” status irj a country whose sophisticated financial status always draws in funds when “confidence” is good. But a very important element in all this has been the .very high interest rates obtainable in. London, which have attracted “hot” money in a way that would make one think the horrors of the collapse of sterling in 1976 had never occurred. Interest rates are closely linked to inflation;

the Government has managed to achieve the almost impossible feat: a monetary policy which, on its own favoured definition, is not. as strict as intended; but a level of interest rates which is sufficiently high to keep money pouring into London and driving the exchange rate upwards, and exacerbating the recession. Much is being made of the “reduction” in inflation announced in the middle of August, but this largely reflects the fact that the figures are now being compared with a base that . includes last year’s VAT increase. The most tangible sign Jo the layman of an easing of (pressures is the price-cutting war in the shops, but this is hardly a source for sustained comfort. In any case, autumn will see a whole spate of nationalised industry

price rises. But, as individual company results and a recent Confederation of British Industry (C. 8.1. survey .suggests, the price war means that many firms are simply losing money, and doing almost anything to get cash, regardless of profit. Perhaps the most disturbing aspect of the recent C. 8.1. survey is that, while companies are not planning as many price increases as they . were, they are still expecting costs to go on rising apace. . In the words of. one Whitehall official, “We hoped that by cutting back on stocks, in-, vestment projects and their labour force, companies would improve their profitability. The terrifying’ thing is we are seeing the cutbacks all right, but the financial position is getting no better.” Without attributing blame, one can say that the first 15 months of Mrs Thatcher’s Administration have coincided with the most drastic worsening of British industry’s financial and competitive position on record, and this is why jobs are threatened even more in this country than in the rest of the world. What is to be done? The Government has already, responded to some extent by embarking on a gentle “U” turn, through a variety of measures aimed at easing the employment problems rather more than its original strict “market philosophy” dictated: massive financial help for British Steel; “buy British” policies for defence equip-

ment; the siting of the new Inmos factory in South Wales; help for Harland and Wolff, etc. But it is still putting its faith in recession for curing the fundamental wage inflationary problem, and eschewing more drastic approaches on the incomes policy front. In the end exchange rate pressures are unlikely to be eased without a drastic ... reduction in interest rates, yet this is dependent on a . much more significant lower- ~ ing of inflationary expecta- - tions than is so far war- ' ranted. « Perhaps the' most encour- - aging news for the Govern- * ment last week was not the fact that the “VAT effect” produced the expected slowdown in -’ the Retail Prices Index but the opinion poll finding of popular support for wage increases of less than 10 per cent in the next »-■ 12 months. ; ( Capitalising on the public mood in a way seen to oe equally fair—or unfair —to all would" offer the Government a chance of bringing inflation ■ down closer to its elusive tmonetary target range of 7 to i, 11 per cent. The initial sacrifice could be followed by a deal that tied incomes doser » to a (decelerating) retail prices index. What I am suggesting is that, paradoxically, the sort of incomes policy the Government abhors appears to be one of the few feasible ways in which it could succeed with the monetary policy it loves so dearly.