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ON THE RECORD
ECONOMIC DISCUSSION
RECORDED FROM TRANSMISSION BBC-1 DATE 31.1.93
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JONATHAN DIMBLEBY: That report by Martha Kearney. The
Chancellor of the Exchequer is in purdah, preparing his budget under acutely
difficult economic and political circumstances - green shoots hardly visible;
unemployment rising; a ballooning budget deficit - while a cacophony of
competing experts offer him a welter of conflicting advice. Here in the studio
three leading economists to whom Norman Lamont will actually listen. Indeed
they've summoned to see him next week so that he can receive the benefit of
their wisdom.
Can I ask all three of you, starting
with you Professor Minford - there's been much contradictory diagnosis, when
you put your stethoscope to the heart of the economy what do you detect?
PROF PATRICK MINFORD: Very, very weak pulse indeed. I think
the economy is very weak, I think that what we have to look at is the effect of
high indebtedness in the United States which is similar indebtedness to here
and that meant that there were three false starts and interest rates had to
come down to three per cent before the economy really showed any signs of
reasonable recovery and I think that's the parallel here.
DIMBLEBY: Okay. David Currie.
DAVID CURRIE: Well, the economy's gone through major
trauma and the patient is now just getting back on its feet, we have the
prospect of some growth this year, quite slow though and there are some medium
term worries over the balance of payments and possibly inflation and
unemployment will continue to rise.
DIMBLEBY: And Andrew Britton.
ANDREW BRITTON: It is frustrating because the news comes
in so slowly, we're tempted to take the patients temperature hourly if not
daily and I suspect we'll need to wait a little bit longer to see what the
response will be to the measures that were taken before Christmas but I see
some encouraging signs including the CBI survey in particular.
DIMBLEBY: So we have from three of you sort of
ranges of extreme caution to a tiny bit of cautious optimism. Now the Treasury
mandarins we're told or at least some are saying that because of the scale of
the public sector borrowing requirement, that huge deficit, the Chancellor has
got to find money out of taxation, what is your advice going to be to him on
that Andrew Britton?
BRITTON: I think to wait some time. I mean it may
well be that next year he needs to put up taxes but I think that it will be a
great mistake to abort this recovery by putting up taxes now.
DIMBLEBY: And you think it would abort the
recovery?
BRITTON: It well might, I think he can afford to
wait. He might announce some plans for taxation in the future to reassure the
markets but he shouldn't actually put taxes up now.
DIMBLEBY: Patrick Minford.
MINFORD: Well I agree with that. I think if
putting up taxes would be a great mistake for essentially that reason and also
because a lot of the public sector borrowing is due to the recession and the
very tight monetary policy we've had. I think the right response is to go on
stressing the determination to have medium term control and reduction of public
spending as a fraction of national income. There's been a bit of back sliding
on that but there's plenty of scope for further control and that's what I think
he should stress.
DIMBLEBY: But do you believe, given your own
erstwhile passionate conviction to the balanced budget over time that it's
possible to deliver a balanced budget in what we used to call the medium term
while it is ballooning upwards, thirty/forty/fifty billion potentially plus as
some say?
MINFORD: Well as a result of the tax reforms of
the eighties there has been an enormously increased gearing of public sector
borrowing to the state of the economy, it's now likely that for every hundred
million fall in national income you get about fifty to seventy million rise in
the public sector borrowing requirement and so we do always find in recessions
that there's a very sharp effect on public sector borrowing but it's
particularly acute this time both because the recession's very acute and
because there's been this tax reform. So I am convinced they must bring public
sector borrowing down over the medium term, that means when recovery has got
itself into place, that's why a monetary policy is so important.
DIMBLEBY: David Currie, are you so sanguine as to
believe that the present borrowing, ballooning borrowing springs almost -may I
slightly misquote Patrick "almost exclusively from the recession"?
CURRIE: No I think there is a structural problem
but like Andrew Britton I wouldn't seek to tackle it early, I think the
Chancellor should wait until December to see that the recovery is well under
way before he talks about raising taxes. But he must take action in the medium
term otherwise we will exacerbate the structural problem......
DIMBLEBY: But you would be with the other two -
there is nothing like enough confidence in the economy in your judgement to say
yes, you can afford to start bringing it down now by putting taxes up, that's
off your three agendas.
CURRIE: He may make a very marginal adjustment
but I think it will only be very marginal.
DIMBLEBY: Let's put into the equation the other
issue that's causing considerable alarm, namely the balance of payments. Here
we are right in the midst of recession, when you might expect to have a surplus
in balance of payments we've actually got a deficit of eleven billion. Is that
not rather alarming before growth has even started again - Andrew?
BRITTON: I think if the.. you remember that we
devalued in September, it is normal for the balance of payments to get worse
after devaluation because import rise prices rise first and the response from
the export side takes time so the trade figures for the period between the
devaluation and Christmas are not in themselves bad news at all. I think that
the balance of payments might well begin to improve and if this happens in the
context of both exports and imports rising strongly I think the markets will
actually put up with that and that we can probably get through at least the
next year without too much anxiety about the balance of payments in particular.
DIMBLEBY: Do you worry about the balance of
payments Patrick Minford?
MINFORD: Well I do in the sense that its a
symptom of over valuation. One of the worrying things when we were in the ERM
was that the balance of payments was so bad when we were in this deep
recession. I think the key thing since then, since White Wednesday or whatever
was the .. has been the flexibility in the pound. I think the pound has got to
be allowed to fall as far as necessary in the light of the emerging trends in
the balance of payments.
DIMBLEBY: That begs a question as far as
necessary; does it mean it can fall out of sight and it doesn't matter where it
falls to, so long as it balances out the problem created by potential balance
of payments deficit?
MINFORD: I think that it must be allowed to move
flexibly. We don't really know what the underlying situation of the balance of
payments is. I'm reasonably optimistic it will be corrected given the fall
we've already had but it's possible it will need to fall further and therefore
we mustn't target it and make the same mistake we made as in the ERM where we
kept it up and actually worsened the situation substantially, both the slump
and of course the balance of payments.
DIMBLEBY: Does it matter David Currie if the pound
goes on down and down?
CURRIE: I think if it goes down and stays down
then it could generate an inflationery problem and much will depend on the
action of the government on the level, on the government borrowing. If it
keeps a large deficit and has a low pound then there are inflationery worries
ahead.
DIMBLEBY: Well given that and the underlying
weakness of the economy which you yourself identified just now does this not
mean that the government to be prudent in your terms as it were is obliged to
somewhat keep the brakes on growth to avoid that inflationery consequence?
CURRIE: I don't think that has to do that over
the next six or nine months. It has an opportunity when it can go for growth
but in next year and perhaps beyond it's going to have tight fiscal policy in
order to keep the pound competitive, and that offers the best way of getting
the balance of payments under control.
DIMBLEBY: Andrew Britton.
BRITTON: I think one suggestion I'd make is that
in setting their target for inflation the government ought to look at the price
of goods produced in this country, not just.. not including the price of
imports which is bound to go up as the exchange rate goes down and that we
ought to be looking at inflation particularly now in domestic terms.
DIMBLEBY: All of what you're saying even though
you don't believe catastrophe is in sight you're not optimistic, has rather
depressing implications if I read it rightly for the government's key political
problem, for many people the key problem in their lives, namely unemployment
because under what you're describing very slow growth, threats for David
Curries says about inflation down the line. Unemployment rises where? You
would all agree well over three million, yes? Everyone's nodding to that.
Where does it on your scenarios, where does inflation.. where does the
unemployment end up in three/four/five the end of the century's time? Patrick
Minford first.
MINFORD: Well in the middle of recessions people
always get very pessimistic about unemployment. I think that in fact there've
been big changes in our Labour market, the potential unemployment rate given
the flexibility now in the Labour market is quite a lot lower than it has been
and I'm optimistic therefore, I think we could easily be looking at a long term
unemployment rate of below five per cent and of course it's over ten per cent
now. So I'm optimistic about that, I think the main problem is to get the
economy recovering and I don't think there's an inflationery threat provided we
keep control of the monetary environment and don't make the mistakes we made in
the past allowing ......... boom of 1988 to get out of hand as we did then.
DIMBLEBY: Can I ask you briefly Andrew Britton
where you project unemployment to go in the real world at the moment?
BRITTON: Well it's going to go on rising for some
months. I think if you're looking further ahead it's not a matter of
projecting, you should say what can be done to bring it back down again and I
do think that if you're looking a year or so ahead there's alot of scope for
policies addressed to the labour market in particular which would have a real
impact, there's no need to tolerate a rate of unemployment so high.
DIMBLEBY: And David Currie.
CURRIE: I think it's going to rise to three and
a quarter, three and a half million and it's going to remain high and it's
going to be very difficult to bring it down because the lesson of the last five
years is that if we run the economy at too low a level of unemployment we get
inflation, we need to adopt structural measures in the labour market to try and
tackle that problem.
DIMBLEBY: Thank you very much, I have to say I
don't see from .. hear from all three if anything's going to make the
Chancellor when he meets you smile a great deal but doubtless he'll listen
closely, thank you.
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