Budget Resolutions and Economic Situation
Mr Enoch Powell (Wolverhampton South West)
The hon. Member for Heywood and Royton (Mr. Barnett) may be surprised—I hope that he will not be dismayed—to discover that my own critique of the Chancellor's basic Budget judgment comes out on not dissimilar lines from his, but whereas he was arguing it on the external accounts I shall be using the internal accounts in my argument.
I begin with an admission which is more often made silently than explicitly in this House by saying that I was mistaken. When, before the Budget, I surveyed the history of the preceding years and noticed that in the last two years the Chancellor had repaid not less than £11 billion of debt in total, I asked myself. "Will he do it again, or anything like it. in his third Budget?" I concluded that he would not.
I was mistaken. The right hon. Gentleman has done it again. He has done it again on a grand scale; for the comparable figure in the Budget accounts which he has laid before the House is once again of the order of £1 billion—a further £1 billion of debt to be repaid by way of overall surplus on the Budget in the coming financial year.
I take the central Government figures for this purpose because I believe that they are more relevant and more appropriate than the figures for the public sector as a whole. After all, it is the central Government accounts which have the most direct bearing on the money supply, on the expansion of domestic credit, which have been at the heart of the concern of the Chancellor of the Exchequer.
Of course, there are very large modifications which one has to introduce in looking at this fantastic figure of £1 billion to be applied to the repayment of debt.
First, there is the cost of the surplus on the balance of payments. A surplus on the balance of payments is, from this point of view, a cost in pounds to the Exchequer. The Exchequer, in effect, has to find in pounds sterling whatever is the amount of our overall surplus on the balance of payments. There was a very big demand, very happily a big demand, in the financial year which has just ended, of about £500 million. It is concealed in the figure of net repayment of debt, because part of the debt repaid consists of those Treasury bills and other internal loans by which surpluses and deficits are expressed as between the Bank of England or Exchange Equalisation Account and the Exchequer. However, this year we probably do not have to reckon, and the Chancellor of the Exchequer is not reckoning, on so large a surplus on the balance of payments. Consequently, there will not be so large a demand on his surplus to meet the counterpart in terms of sterling.
The second factor which the Chancellor has to remember is the partial unwinding of the import deposit scheme which is to take place this year. The cost of this is assessed at approximately £330 million, another large sum which he must rightly take into account in striking his overall judgment.
Finally, there is the figure, rightly never revealed by the authorities, of the amount of maturing debt in the hands of the public which may have to be redeemed in cash during the coming financial year.
So there are these three offsets to be made against the huge surplus and the huge net repayment of debt which the Budget statement features. But then there is a very big element on the other side. That is the Government's probable ability to borrow from the public, the non-banking public. Here the Chancellor is fortunately placed at the moment. He can look forward, after a net borrowing from the public in the year 1969 of about £420 million, as he disclosed in his Budget, to a very large sum again during 1970. After all, he is in a period in which not only are interest rates falling, but there will be the general expectation of a further fall, which always assists sales of debt to the non-banking public.
Nevertheless, when we have made these allowances on both sides, we are still faced with this fantastic phenomenon, which has no parallel, of three successive Budgets which will have resulted in a net repayment of debt of about £2¾ billion. There has certainly been nothing like this in post-war experience. I doubt whether there has been anything on this scale in living experience. In the past, iron Chancellors, or, at any rate, Chancellors in years when they were iron, have with the utmost endeavour managed to minimise their net borrowing requirement. There has not been a case when they have even crossed the edge from net borrowing to net repayment of debt.
Here, in contrast, we have this tremendous continuing surplus applied to net repayment of debt. It is a phenomenon so remarkable that it is strange it should have attracted so little attention not only in comment out of doors, but in this debate on the Ways and Means Resolutions.
When he succeeded to his office 2½ years ago, the Chancellor initiated what we now see in retrospect to have been a profound change of philosophy and policy. He based his policy upon control of the money supply and control of domestic credit. He is entitled to point to, and take credit for, the immense turn-round which he has achieved in this respect over the last two or three years. Gone, gone almost beyond recollection, are the days of his predecessor, when, so far from net replayment of debt of the order of £1 billion, we were seeing net borrowing requirements which were generating additional monetary demand, additional money supply, of about that order, if not greater.
The right hon. Gentleman has forced firmly into reverse the money-manufacturing machine which his predecessor was operating so gaily. But there is a point beyond which the reversing of this machine has no effect, after which, instead of the gears biting, the wheels merely slip. If the Government put themselves into a position in which, because they have little or no net borrowing requirement, they are not dependent upon the banking system to meet their marginal needs, then they can avoid increasing the money supply and can exert control over further expansion of credit. By going further still, they can gain the means to increase their grip upon the banking system by funding debt—by replacing debt held by the banks with debt held by the public. That, indeed, can be done, and often has been done, even with a substantial net borrowing requirement; for if the Government are nevertheless able to borrow from the public they can still carry on the process of funding.
What is certain is that beyond the point at which the Government are refraining from themselves increasing the money supply and are using to the full their power to control the credit mechanism of the banks, repayment of debt is virtually meaningless in an economic sense. It is little more than a recirculation, whereby cash is brought in through one set of channels and redistributed through others.
One is forced to ask why it is that in this year, in this third year, the Chancellor should still be operating his machine in such an over-hitting manner. Why is he over-ensuring to this fantastic extent when he already, as a result of the operations of the previous two years, has a grip on money supply and on domestic credit which any of his predecessors for a long time past might have envied?
Of course we know: it is the spectacle which he is watching of an apparent acceleration of inflation when it should be slowing down. He sees wages and prices rising not slower but faster. He is apparently faced by events which contradict before his very eyes all his assumptions and all his logic of the last 2½ years. One can understand his shock on discovering that the remedy, implicitly believed in and pursued with such tremendous vigour, not only appears to have made no impression upon the malady, but to be consistent with the malady actually deteriorating.
In these circumstances, with that spectre before him, fain would the Chancellor have switched back to the alternative theory, the cost-push theory, to the mechanisms of direct control, prices and incomes policy and all the rest. the policies accepted and advocated by those who despise, who ridicule, money supply and the control of domestic credit. But he could not—he had no weapons.
Last year, in his Budget speech, the right hon. Gentleman was still fingering the edge of one such weapon in his commendation of the then intended trade union legislation of his colleagues. This year, he has not even got that. None of the mechanism, none of the weapons, none of the instruments of the alternative theory, of the theory of direct control, remain. Prices and incomes policy, trade union reform, the whole lot has gone.
So, between the apparent refutation of what he has relied on in the last two or three years and the ruins of any means of working upon the opposite hypothesis, it is not perhaps surprising that the Chancellor of the Exchequer has just shut his eyes and driven blindly ahead in the same direction as he has been following in his two previous Budgets. Thus it comes about that he has actually defied the logic of his own theory and his budgetary position by creating, once again, a huge surplus for the repayment of debt.
Unhappier than the astronauts, the Chancellor of the Exchequer has missed his course for re-entry. Instead, his module, no longer in communication either with his own theory of inflation or with the opposite theory, is hurtling out into budgetary space, propelled by ever-increasing surpluses.
But it is not only the Chancellor of the Exchequer who is in this quandary. Hon. Members must not let themselves off so easily. The whole House is in- volved in this quandary of the Chancellor of the Exchequer. We are all faced by this paradox of a period in which, to an unprecedented extent, money supply and domestic credit have been controlled, in which the classic remedies have been applied—it is an understatement to say, pedantically—and still we see ourselves confronted with an increase in inflation apparently happening month by month. We are all called upon to take up a position—to make our own peace, as best we can, with this paradox. At least, we ought to begin by recognising that it is a paradox and that it is a challenge to monetary thinking and budgetary policy on both sides of the House.
I want to make three contributions to the handling, if not to the resolution, of this paradox, which I believe has led the Chancellor to make a profound budgetary misjudgment. That is where I agree with the hon. Member for Heywood and Royton.
First, there seems to be an almost weird parallel between the besetting problem of our generation and the besetting problem of the generation between the wars. Our predecessors between the wars thought, strove, theorised, budgeted, legislated in an endeavour to cope with unemployment. We now think that we are wise. We now think that we would have known the answer all the time. But not only in Britain, but also in the Western world—and here, too, there is similarity—the economic problem of that day proved inaccessible to the reasoning and to the policies of all parties both here and elsewhere.
Fortunately, the corresponding challenge of our own day is less tragic, but it is just as persistent. We share it with other Western countries—perhaps not only Western countries, but certainly with those—and we deceive ourselves and, what is perhaps more serious, those whom we represent if any of us pretend that we have a theory ready to be turned into action which fully explains the phenomenon of inflation and would banish it for ever if only we were allowed to have a chance at the levers. There is sometimes something to be gained by recognising, and recognising candidly, that we may all be in the presence of phenomena which we do not fully understand.
Secondly, I think that the Chancellor's difficulties are very much greater because, as between the two ways in which he might have operated during his period as Chancellor—either upon public expenditure or upon taxation—he chose to operate almost exclusively upon taxation. If he was set upon finding a means to bring into balance—and more than balance—the cash requirements and the cash receipts of the Government, and so to gain some grip upon money supply and domestic credit, there were two ways, or a combination of them, in which he could have done it. The right hon. Gentleman might have operated massively upon public expenditure, or massively upon taxation, or a balance of both. In the event, it was overwhelmingly the second choice which he took—to operate massively upon taxation.
My right hon. Friend this afternoon reminded the House how the Chancellor candidly, though not within these shores, took credit for the extent to which he had done so. I believe that that has made his predicament now more painful. It has made it more difficult for him now to get down off this procession of budgetary surpluses, based on extremely high taxation, which has characterised his administration. I believe that if instead he had operated more upon public expenditure, he would not have been facing the dilemma which faced him—a huge surplus, which was there to give away, but which he did not dare to give away in the circumstances in which he found himself.
The third factor which I believe we should take into account is time-lag. We are all tempted to ascribe to budgetary and other money methods of controlling inflation a more precise, definite, and visible effect than they really have. The inexactitudes, the intervals of time between cause and effect, and the interferences between cause and effect, are much greater than in our impatience, or perhaps our pride, we are ready to concede. We have seen this recently over this country's balance of payments.
I believe that many of us, from the day of devaluation, sat back waiting for the balance of payments to right itself, realising that from that time onwards, and for long to come, the £ would no longer be, as in the past, over-valued, but, if anything, under-valued. We waited. We had to wait the rest of 1967, the whole of 1968, and into the beginning of 1969. Only during 1969, and ever more clearly as 1969 went by, did the mechanical and necessary consequences which one had predicted from getting the exchange rate right, or at any rate wrong in the opposite direction, duly make their appearance. Yet I do not think anybody would have guessed that it would take something like two years for the effect of righting the exchange rate to show itself decisively in our balance of payments.
It may be that the time-lags in this business are much longer than we are ready to concede. For my own part, I believe we are still gathering, in 1970, the poisoned fruits of the Budgets of the right hon. Gentleman's predecessor. We are seeing the creation of additional credit, the creation of additional money supply, which his disastrous last year brought about, still working their way through the economy.
The Chancellor ought to persist in his belief in the efficacy of money supply and domestic credit. He ought not to grow pale at the apparent contradiction between the phenomena of the current months and his budgetary accounts, but ought to follow the logic of his policy, and aim, not at a meaningless, over-hitting, over-insuring surplus and repayment of debt, but at a genuine balance between Government outgoings and incomings, which will suffice to continue the control he already has over credit and money supply.
There is a historic appropriateness in the fact that this paradox, this dilemma, should have presented itself to the Chancellor and the Government in this, their last year for I believe that it is only by a remoulding of public expenditure upon the grand scale that we can now escape from the impasse into which the Chancellor and the Government have got themselves. There is some propriety in the fact that it will fall to a new Parliament, and a new Government, to resolve if they can—and, if they can, I believe it will be in that way—the paradox of which the Chancellor's Budget is a striking, almost a tragic, expression.