Britain: Too Much Deflation?

Britain's deflationary policy may be turning out to be all too stringent. Through high taxes and credit restrictions, Prime Minister Harold Wilson is trying to reduce consumer spending and raise exports and investments. But Wilson realizes that it is hard to cut consumer spending without simultaneously drying up investment—because in large part, investment is a response to demand. The country, headlined the Guardian, appears to be HEADING FOR A DEEP RECESSION.

So far, the main effect of the three-month-old Wilson squeeze has been to pinch vital private capital investment much harder than most Britons had expected. The government's Board of Trade last week predicted that investment will drop 7% or 8% next year. The Confederation of British Industry expects an even worse fall—15% to 25% during the next twelve months.

Capital for investment is becoming scarcer because of Wilson's extraordinary Selective Employment Tax (TIME, Sept. 16). By forcing employers to pay a frankly discriminatory head tax on workers in the service trades and giving tax rebates to employers in export-oriented manufacturing industries, the measure aims to shift British workers out of areas that serve the consumer and into those that serve the pound. The tax is siphoning cash out of corporate treasuries at an annual rate of $2 billion, which is about one-fourth the amount that private industry normally invests in capital improvements. One other result of the deflationary policy has been a jump in unemployment, which rose last month by 100,000, to 370,000. Reflecting some Britons' fears of depression-style mass layoffs, one cartoonist drew a portly Wilson in a wide-lapelled 1930 suit with a breadline in the background. At the same time, the Labor government's spending has expanded despite Wilson's promise of restraint. In September, public-housing starts topped private housing 18,000 to 14,900. By the second half of 1967, predicts the London and Cambridge Economic Bulletin, public capital spending will exceed private capital investment, $3.70 billion to $3.65 billion, thus giving nationalized industry predominance in the British economy for the first time. The decline of demand, employment and profits has eroded investor confidence. Prices on the London stock exchange fell to 1966 lows last week, down 22% since June. The pound, too, slipped on world money markets, and the Bank of England had to come to its aid once more with support purchasing.