Britain's financial predicament

BEHIND the story of the row between Nigel Lawson, the British chancellor of the Exchequer, and Prime Minister Margaret Thatcher's reinstated adviser, Sir Alan Walters, is another story altogether, which the news media up to now have ignored. Sir Alan is a monetarist economist. Mr. Lawson is viewed by Tory back-benchers in Parliament as the most successful chancellor in 50 years, and he abandoned the strict monetarist line four years ago. He is for managed money now.

But he has cut income tax to 25 pence in the pound and could very well cut it further. Britain's rate of economic growth (above 4 percent annually) is the highest in Europe. Unemployment is falling. Incomes have never been so high. The budget is in surplus, and there is no government ``borrowing requirement.''

But there are other ``buts.'' But Britain has a huge trade deficit and a large payments deficit. Unless something remarkable happens, both of these will get worse as the the European Community advances toward the single market planned for 1992.

Yes, income tax has been cut substantially. But the total tax take - taxes, duties, licenses, charges, and so forth which go straight to the government - remains as high as ever, about 50 percent of gross national product.

Yes, incomes have never been so high. But the gap between the well-to-do and the not-so-well-to-do is widening rapidly. This is inevitable under present policies, for the poor pay the same local taxes, value-added taxes, gasoline taxes, car taxes, TV licenses, excise duties, and the rest that the rich pay.

Yes, the budget is in surplus, and yet inflation is rising - faster in human terms than is officially admitted. The official measure of inflation, the retail prices index (RPI), does not include some important costs that the average man and woman have to meet. So the actual experienced cost of living is going up much faster than the RPI would suggest.

The difference between the two measures has led to the earnings of those with jobs rising faster than the chancellor would wish. Because of this, inflation accelerates. At the same time, the gap between the living standards of those in work and those out of work - still more than 2 million - widens. As does that between the rich and the poor. And between the young and the old.

There is another consequence, too. Because of what may be called ``hidden taxation,'' referred to above, even those with big salaries are becoming dependent on credit for their high standard of living.

Banks and finance houses of various kinds now manufacture credit - money - at an alarming rate. And at usurious rates of interest. Some credit cards charge more than 30 percent annually. The money is manufactured out of thin air, but the interest is not. It has to come eventually out of capital one way or another. Meanwhile, further inflation is encouraged because, with high inflation, the real value of a debt declines: After seven years a 10,000 debt in real terms may be worth only 5,000. As a finance house chairman once said to me, ``Get into debt as soon as you can for as much as you can, and pay back at the last possible moment.''

While the economy booms, property prices soar. If you had purchased a small three-bedroom house in a south London suburb for 10,000 some 20 years ago, you could sell it today for a quarter of a million. Possibly even more. And I'm not exaggerating.

The basic situation, while in some respects is so encouraging - growth, falling unemployment, rising wages and salaries, reduced income tax - is thus worryingly unstable.

Which, no doubt, is why Prime Minister Thatcher has brought back her former adviser, Sir Alan, to 10 Downing Street. And why the talk now is of Lawson - the best for at least 20 years - leaving politics within one year and taking a job in the City (London's Wall Street), where of course he would become very, very wealthy. To a monetarist, it is the total government ``take'' from the economy that matters most right now - income taxes, local taxes, property taxes, sales taxes, excise duties. For stable growth, this has to be reduced. The total money supply, including bank credits, has to be controlled. Inflation has to be outfaced realistically. And tying the British pound to other European currencies has to be postponed until the basic instability of the current situation has been removed.

Total taxation, not just income tax, has to be reduced way below 50 percent. That's the story behind the story featured now in British and European newspapers and on radio and TV.

John Allan May is a longtime analyst of British and European economic affairs.

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