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International Socialism, May 1975


Sean Treacy

The Budget and After


From International Socialism, No.78, May 1975, pp.3-4.
Transcribed & marked up by by Einde O’Callaghan for ETOL.


Notes of the Month

Sean Treacy writes: The single most dominant theme in the budget is quite simply that the time that British capitalism has to put its house in order is starting to run out. In the past 12 months the British economy has been kept afloat by a tide of oil state money deposited with London banks. The scale of invested funds has been sufficient to finance both the bulk of the £4000 millions balance of payments deficit and also the financing needs of the government, the nationalised industries and the local authorities. But there is a limit to the willingness of British capitalism’s foreign creditors to stand by and see their funds lose value by more than one fifth a year – the current rate of inflation. Healey had three immediate objectives last month. First, to sharply reduce the balance of payments deficit and thus reduce the need for further infusions of life saving loans. Secondly, to control and cut back the massive public sector ‘deficit’; that is the amount of money the state spends in excess of its receipts. This is both a direct cause of much of the balance of payments deficit and indirectly fuels inflation since the government is always tempted to finance its own spending deficit by printing more money. Finally the government aims to transfer resources from working class consumption to finance capital accumulation and exports. The transfer is to be achieved by bringing about a situation in which money wages fall below the rate of increase in prices thus boosting profits, while at the same time tax and other concessions also give direct help to profits, particularly of those firms exporting and investing. But, above all, success depends on the rate of inflation being brought down from its present annual rate of more than 21 per cent to closer to the 10 per cent average for British capitalism’s most important international trade rivals.

But the methods which Healey has used risk making the cure worse than the disease. The so-called Social Contract has obviously failed to deliver the goods. In spite of the unremitting endeavours of the great mass of trade union officialdom, workers have still managed, on average, to just about keep pace with inflation. Clearly the objective of a substantial cut in real wages needs a new back-up. The government has quite cynically chosen to use increased taxes to take away the bulk of any pay increases already won and to increase unemployment in order to weaken the determination of trade unionists to put in for and stick by wage claims big enough to see their real living standards maintained. But as a result of the higher taxes prices will go up by nearly three per cent faster than they otherwise would. The risk is obvious. Workers, even those influenced by the willingness of leaders like Jack Jones to give endless concessions to the government, will be incensed at this deliberate twist to the cost of living spiral. And they will fight back all the harder.

A faster rate of inflation in the short term also seems certain to weaken the international value of the pound. Indeed the government may not oppose this because it can give British exporters a chance of winning a bigger slice of international export markets. But in the short run a lower external value for the pound will increase the balance of payments deficit (except in the unlikely event of British industry being able to enormously increase the volume of its export shipments during a world trade depression). It must also push up the cost of living by making imports dearer. And given the doubtful prospect both for the world economy this year and the extremely doubtful chance of any sharp deceleration of inflation there are going to be precious few industrialists tempted by the budget’s massive tax and other concessions to increase productive capacity when they already have so much idle plant and machinery.

Thus far, it might be argued, it is the same old story – only more so. But there is a new twist. The world recession this year, which will be longer and deeper than any since the war, is slowing inflation abroad. The gap between British inflation and that in the other main capitalist economies is growing. And that poses a deadly threat both to any continued inflow of foreign funds to London and also the raising of future international loans. Even if the oil states do not pull out of sterling overnight (which they could do but are unlikely to) they only have not to add to their investment in London to impose crippling pressure on sterling. But if the government does raise official new loans to back sterling they will only be given with tough conditions attached. The IMF and other creditors will either want even more unemployment (to break the back of working class resistance to attempts to cut real wages) or will want a return to a statutory wage policy. Even if the Tories and the Labour right wing win the EEC referendum the relative deterioration of British capitalism’s international performance could lead to a sterling crunch later this summer or in the autumn. It is at that point that the established pattern of British – and especially Labour movement – politics could undergo some violent changes.

The Watershed

THE BUDGET is the turning point for the Labour government.

‘Mr Denis Healey’s budget on Tuesday,’ says The Economist (19.4.75), ‘is a political bomb on what could be a short fuse. The length of that fuse will be measured partly by luck. Partly by whether Britain’s foreign creditors will put up with the astonishing revelation that British government borrowing is now rising to over £9,000 million for 1975-76, even after the massive indirect tax increases in this budget designed to bring it down. Partly by whether the British Labour Party, its left-wing in particular, has the sense to hold together during its self-inflicted muddle over the Europe referendum campaign.’

This is an accurate assessment. It is the political conjuncture, rather than the longer term economic one, that will determine the immediate prospect. Healey has produced a classic Tory budget – and the reaction of Labour’s ‘left-wing’ is a pathetic whining, a quibbling about means, when what is at issue is the end. For Healey and the Labour Cabinet the end is the strengthening of British capitalism, against its foreign competitors, yes, but above all against the British working class. And the ‘lefts’ – represented in the cabinet by Benn, Foot and their fellows accept, support and defend this Tory budget.

It is an astonishing state of affairs – except to those who know the record of the Labour ‘lefts’ – that a budget applauded by every right wing organ of opinion, a budget praised by the official Tory spokesman Maudling as ‘courageous’ should be swallowed by those very ‘lefts’ who are currently campaigning against the Common Market. For the immediate inflationary tax increases, savage as they are, are only the froth on the pint. The first message of the budget is that social services (’public expenditure’) are to be slashed with a savagery that will make Ted Heath’s attacks on welfare look like a pink liberal’s tinkering. The government is responding to the relative success of public sector workers in securing pay increases that more or less maintain their living standards by cuts that will force large scale redundancies in the education, health and welfare services. The second message of the budget is that the government has opted for unemployment as the weapon to tame workers in the private sector. In our March issue we argued: ‘Labour has one more economic option, the use of budgetary measures to cut consumption, and it is an option that will be taken, perhaps in conjunction with steps to further lower the exchange value of sterling to stimulate exports. On past form such steps can be expected to have only a temporary effect. Increased wage pressure to offset the effects of higher taxation is the usual response ... yet if such measures are ineffective – and it is a question of effect on qu ite a big scale – Labour must resort to statutory incomes policy or to mass unemployment or to some combination of these.’

It is now clear that Healey has gone for unemployment. That does not rule out a new attempt at statutory incomes policy later this year. It all depends on how successful is the attempt to intimidate workers by lay-offs and closures. If the fight back is on the scale of 1970/71 then an incomes policy of one sort or another before Christmas is a likely bet.

The economic and financial policies of the Wilson government are now far to the right but their full effect will not come until after the referendum. Indeed, many of the cuts are, at present, scheduled for next year. But once the referendum is over they are likely to be speeded up. The reaction of even the TUC chiefs to the budget – Social Contract as before, but it is ‘unrealistic’, as Murray put it, to expect that compensatory wage claims will not be forthcoming – means that Healey will tighten the screws again as soon as he dares. The anti-EEC campaign must now be broadened into a general attack on government economic policy. The Labour lefts, in their great majority, are trying to limit the campaign, to keep down the temperature and to focus the arguments around the economic aspects of ‘sovereignty’. But it is ludicrous to denounce the EEC Commission’s powers to create unemployment through regional policy, or lack of it, and ignore the actual and massive attacks on employment and welfare made by the Labour government. There is little prospect of winning a NO vote without harnessing the discontent engendered by the budget. And a YES vote will be a victory for the right-wing coalition led by Wilson that will open the road to still more savage anti-working class policies.

Not for nothing has The Economist taken to referring to Ramsey MacWilson. The basis for a ‘National Government’ is being laid in the Tory/right-wing Labour coalition that has now formed on the EEC issue. The budget is the watershed that marks the end of all serious pretence by the government of ‘reformist’ policies on the economic front. The referendum will be the corresponding political divide.

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