When it comes to money, Britain’s problem for years has been where and how to borrow enough to keep its rickety economy going. Now the British government faces exactly the opposite question: how best to spend the $40 billion or so that will flow into the national treasury in the next seven years. That is obviously a happy problem, but a problem nonetheless: while a right decision offers Britain the chance at last to break decisively out of the cycle of ravaging inflation and high unemployment in which it has been trapped, a wrong choice could keep that cycle going.
The source of the bonanza is North Sea oil. By the end of 1977, taxes and royalties on it will have brought the government a trifling $9.5 million. But during 1978 and 1979, the government’s take will multiply a thousand times, and by the mid-1980s Whitehall’s share will be running at $6.7 billion a year.
The money is beginning to roll in at just the right time; after three nightmarish years, Britain is finally getting its economy in order. Much of the credit goes to the International Monetary Fund, which a year ago made available $3.9 billion in loan money to Britain in return for a severe austerity program. The IMF loan prevented a collapse of sterling. A long period of voluntary wage restraint, accepted by Britain’s powerful trade unions at the Labor government’s prompting, has reduced inflation from a Latin American annual rate of almost 27% in August 1975 to a still high 13% now.
The decline of inflation has given a welcome boost to British exports, which during 1977 significantly increased their share of the world market. As exports have risen and the pound has steadied, foreign capital has once again begun to flow into Britain, converting a 1976 balance-of-payments deficit of $6.9 billion into a surplus of $10.3 billion in the first nine months of 1977 (including both current transactions and capital movements).
Freed from worries about the pound and payments deficits, the government can now turn to correcting the long-term economic neglect that has made Britain the industrial world’s basket case. Since November, the Labor Cabinet has been debating five main options for using the North Sea revenues: 1) accelerate repayment of the country’s $24 billion in accumulated long-term foreign debts (an unlikely choice), 2) develop alternative sources of energy against the day when North Sea oil runs out, 3) expand public services in order to reduce unemployment, which last month declined only slightly from its autumn-long postwar record level, to 6% of the labor force, 4) increase investment in modernizing Britain’s woefully outdated plant and equipment, 5) cut taxes. The decision, which will not be made until Parliament debates the issue in the next few months, undoubtedly will be some combination of several of these alternatives.
Right now the Callaghan government is leaning toward putting most emphasis on tax cuts. One obvious reason is to improve the Labor Party’s chances of winning the general election that the government seems likely to call for next autumn. But there are economic arguments for a tax cut too. Current income tax rates, which begin at 34% for individuals with taxable income in excess of $1,796 a year and escalate to 83% on income over $38,000 annually, stifle incentive and initiative. A tax cut also would increase consumer demand, in theory prompting industry to increase production and hire more workers.
Moreover, if properly presented to the unions as a reward for continued wage restraint, a tax cut could hold off the threat of another pay explosion. That inflationary threat is very real; last summer the unions tore up their “social contract” with the government and insisted on a return to free collective bargaining. Since then, they have won wage boosts exceeding the government’s 10% guideline from some private employers—12% from Ford of Britain, for example. The government has been holding the line on wages for its own employees—who, counting those in nationalized industries, total 7.3 million or 30% of all British workers—but it is under increasing pressure to raise pay levels. Britain’s 32,000 firefighters have been on strike since November for a 30% boost, and the 260,000 members of the militant National Union of Mineworkers, who work for the National Coal Board, are demanding pay raises as high as 90% when their contract expires in March.
A tax cut holds some inflationary dangers of its own. Britain has the lowest productivity and most antiquated industrial plant and equipment of any major European state. A tax cut could well make British customers demand more goods and services than the country can produce, leading to a rash of domestic price increases and sucking in imports at an inflationary clip.
Callaghan’s left-wing Energy Secretary, Anthony Wedgwood Benn, proposes instead to use North Sea revenues to raise the budget of the National Enterprise Board to $1.9 billion a year, more than triple the present figure. The N.E.B. makes loans and grants to industries strapped for investment capital. Benn’s scheme is opposed by Labor moderates and the Confederation of British Industry; both see it as promoting further government intrusion in private industry. Yet some way must be found to channel oil revenues toward the modernization of industry if Britain is to meet consumer demand and remain competitive in world markets.
Adding up the plusses and minuses, Chase Manhattan Bank’s chief European economist, Geoffrey Maynard, asserts:
“The outlook for Britain is better than at any time in the postwar years.” He could be right—if the government finds the proper combination of tax cuts and investments in modernization. On the other hand, overly generous tax cuts, a niggardly attitude toward investment and a government cave-in to union wage demands could accelerate inflation again and continue industrial stagnation. North Sea oil does give Britain the chance to start the long climb to price stability and high employment—but it would be all too easy for the nation to blow that chance.
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