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Britain: Still Freezing

5 minute read

At pay-for-your-own drink parties in the London Hilton, the typical tippler has cut his intake from six to four. Already four Mayfair hotels have received cancellations on eight major Christmas celebrations. Christmas buying usually begins in mid-November, but this year it has not begun yet. The nation of shopkeepers grumbles that sales of television sets are down more than one-third from last year, and sales of autos are down more than onequarter. These are a few of the outward results of Prime Minister Wilson’s program to achieve national economic strength through deflation. And the indications are that the Prime Minister has given his country too big a dose of austerity.

With the economy at a real crisis point, Wilson’s government last summer imposed a “freeze” on wage and price increases. The main aim was to make Britain more competitive overseas by reducing consumption and costs, while raising exports and investment for industrial modernization. At the start, the government said that beginning Jan. 1, the freeze would thaw into a mere matter of “severe restraint.” Most Britons took the freeze with stiff upper lip, but they also looked forward to New Year’s Day, by which time business as usual—or almost as usual—could be resumed.

It has not turned out that way. Exports rose only $93 million from July through October, and Britain’s gold and foreign currency reserves went up only $64 million last month. Meanwhile, the production index in October fell 3%, worst plunge in four years. Capital investment is declining, primarily because businessmen lack confidence in the economic future. Even Wilson’s best friends have begun to tell him off. Last week the Socialist-leaning New Statesman called his deflationary policy “the most reactionary kind of bankers’ philosophy,” and asked rhetorically: “How long can we afford Harold Wilson?”

New Stranglehold. What disturbed critics was a White Paper in which the government made plain that for the most part the freeze would persist at least through mid-1967, and perhaps for long thereafter. The decision may or may not have been wise, but it took some courage. “There is no joy in this White Paper,” said the London Times. “It all adds up to a squeeze that is becoming a stranglehold.”

The White Paper blackened everybody’s holiday mood. Unions were upset because the government’s policy for the next six months calls for generally continuing the freeze on wages. Businessmen were mad because theoretically the clampdown continues on prices as well, and the authoritative magazine Management Today has forecast that profits in 1967 will drop 12½%. Corporate chiefs cannot understand how the government expects them to increase investments while profits and consumer demand are weakening. And economists are none too happy because the policy for next year has so many discriminatory exceptions that it threatens to frustrate the British battle for solvency.

The most egregious loopholes are in wage policy. Though the White Paper forbids newly negotiated wage increases in the first half of 1967, it permits hikes that had been agreed to before last July 20 but have been put off during the current freeze. It also says that employers with an “established pattern” of granting fixed annual wage increases may do so next year. Of Britain’s 23 million workers, as many as 8,000,000 stand to get hikes, and the country’s overall wage levels are likely to rise 4% in 1967.

Prices & Budgets. The policy on prices is almost as curious and confusing. Boosts will be tolerated if companies are hit by hikes in the prices of imported materials, in seasonal costs or taxes. The biggest price loophole permits increases if they are necessary “to maintain efficiency and undertake necessary investment.” Interpreting that liberally, some businessmen might try to raise prices simply to expand profits. Typical reaction from one retailer: “If we don’t put prices up, our stockholders will turn us out of office. So how do we raise prices? We have new lines, new brands, new models, new styles.”

Government spending will also rise. Economists reckon that built-in budget increases are almost unavoidable in six categories: pensions, defense, education, national health, unemployment pay, and supplies to Zambia to offset Rhodesia’s economic squeeze on that country. While bank loans to private business declined $170 million last month, loans to finance nationalized industry grew by $65 million because the government is rapidly expanding nationalized housing and other public enterprises. Experts forecast that the budget for fiscal 1968, to be submitted in April, will be up 8% .

“Sheer Damn Laziness.” Despite the many escape clauses, the main point is that Wilson intends to press on with his brand of deflation—and it has shaken the employment situation severely. Unemployment has swollen to more than 6% in Northern Ireland and close to 7% in Birmingham. Total unemployment has doubled since July; last month it jumped by 105,000, to 542,000 workers, or 2.3% of the labor force. Though Wilson figures that a little unemployment may help cure what he calls “the sheer damn laziness” of many British workmen, political realities may well force him to moderate deflation once unemployment reaches 750,000. At current rates of increase, that level will be reached in January.

A hint that the government may have to ease up came recently from one of Wilson’s key aides, Richard Grossman, leader of the House of Commons. “The consumption cutback was drastic enough to achieve our aim,” he said. “But was it too drastic? That it was is the conclusion now being drawn from the disappointing productivity figures. We must watch out and prevent the cutback from going too far.” Wilson thinks differently, confidently believes that his government is the first ever to take peacetime control of Britain’s lackluster economy. Says he: “We must not lose our nerve during the difficult weeks and months immediately ahead, or get panicked into a premature reflation before we have got our imports and exports and overseas payments into balance.”

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