A critical political argument is developing in the Cabinet which could affect the whole structure of the British economy in the next 12 months. It revolves around the measures which are to be included in a mini-budget which the Chancellor of the Exchequer is to introduce some time in November. Two distinct arguments are coming to the fore. First, whether the measures should take place without waiting to see (as the Chancellor of the Exchequer demands) what level wage settlements take. Secondly, whether it is possible to break with the requirements of the MN loan, now that the forecasts on public spending and borrowing which have come from the Treasury have been proved totally wrong.
The first argument involves a fear among some Cabinet members that the manner in which the Treasury is operating on pay settlements ‘is quickly alienating trade union support’. They point out that, far from the Treasury approach holding back pay claims and settlements, it is pushing the unions into damaging industrial action and a determination to settle only at a level above the “norm”.
They also point to evidence that the TUC economic committee is now demanding £3,000 million worth of reflation in November and next spring. That is far above the figure which the TUC was talking about in July when it seemed that the Government was not going to play around with pay “norm” or sanctions against firms which broke them.
Denis Healey, as usual, is leading the Treasury (and the majority of the Cabinet) in another determined effort to link any reflationary measures with “moderation” from the unions. But there is some evidence that the majority may melt away if the unions press serious industrial action.
Even some of the usually pro-Treasury Ministers believe that the only way to get the unions to co-operate again is to take measures in November, as early as possible, which will get the economy moving.
The opponents of the Treasury strategy point out that Denis Healey would soon regret his Labour Party conference speech in which he said that “from this moment” unemployment and standards of living would start improving.
The nil growth in production and the infinitesimal increase in demand, shown by official figures last week and this week, point to the fact that his previous “ reflationary” tax cuts have done nothing to pull Britain out of the slump, even if they improved financial “confidence”. The danger is that, between now and January, unemploment will continue to rise and production will stagnate.
On the issue of the IMF’s terms, recent Treasury predictions have made that operation even more questionable. The borrowing requirement is well below Treasury forecasts.
And, if the Government adhered to the IMF guidelines, it would not be able to go for the modest £1,000 million worth of tax cuts now being talked about. So — with the IMF assessors coming to London at the end of November — the Government is in a dilemma. The minority in the Cabinet say that both the Treasury and the IMF must be overruled. With a great deal of justification, they argue that if less than £2,000 million is pumped into the economy in November (and half of it in restoration of public expenditure cuts) then, even with a further budget in the spring, the economy could be stagnant and unemployment could be 100,000 higher than it is now.
Talk about restoring public expenditure cuts has started off a massive campaign against reflationary measures in the City, the Treasury and in the press. But, so far, unpublished figures about what will happen to unemployment if public sector cuts are not restored are now frightening even the most reactionary Treasury suporters. And a drop in the growth rate of trade among industrial countries is now being forecast for next year, so the latest optimistic trade figures showing Britain’s exports climbing may not be repeated in 1978 (with the exception of oil).
So what is happening in the Cabinet is almost a re-run in reverse of last November’s crisis meetings. Those who then opposed continuing with the Treasury economic strategy can — and no doubt will — point out that it is quite wrong to believe that the IMF policies then adopted have been the saviour of the British economy.
They will also be able to point to what the IMF was saying itself only a month ago about its own failure to tackle the problem of unemployment and low growth while it concentrated in a single-minded fashion upon the dangers of inflation.
by Geoffrey Sinclair