Business: Time to Be Bullish on Britain?

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Right now the Callaghan government is leaning toward putting most emphasis on tax cuts. One obvious reason is to improve the Labor Party's chances of winning the general election that the government seems likely to call for next autumn. But there are economic arguments for a tax cut too. Current income tax rates, which begin at 34% for individuals with taxable income in excess of $1,796 a year and escalate to 83% on income over $38,000 annually, stifle incentive and initiative. A tax cut also would increase consumer demand, in theory prompting industry to increase production and hire more workers.

Moreover, if properly presented to the unions as a reward for continued wage restraint, a tax cut could hold off the threat of another pay explosion. That inflationary threat is very real; last summer the unions tore up their "social contract" with the government and insisted on a return to free collective bargaining. Since then, they have won wage boosts exceeding the government's 10% guideline from some private employers—12% from Ford of Britain, for example. The government has been holding the line on wages for its own employees—who, counting those in nationalized industries, total 7.3 million or 30% of all British workers—but it is under increasing pressure to raise pay levels. Britain's 32,000 firefighters have been on strike since November for a 30% boost, and the 260,000 members of the militant National Union of Mineworkers, who work for the National Coal Board, are demanding pay raises as high as 90% when their contract expires in March.

A tax cut holds some inflationary dangers of its own. Britain has the lowest productivity and most antiquated industrial plant and equipment of any major European state. A tax cut could well make British customers demand more goods and services than the country can produce, leading to a rash of domestic price increases and sucking in imports at an inflationary clip.

Callaghan's left-wing Energy Secretary, Anthony Wedgwood Benn, proposes instead to use North Sea revenues to raise the budget of the National Enterprise Board to $1.9 billion a year, more than triple the present figure. The N.E.B. makes loans and grants to industries strapped for investment capital. Benn's scheme is opposed by Labor moderates and the Confederation of British Industry; both see it as promoting further government intrusion in private industry. Yet some way must be found to channel oil revenues toward the modernization of industry if Britain is to meet consumer demand and remain competitive in world markets.

Adding up the plusses and minuses, Chase Manhattan Bank's chief European economist, Geoffrey Maynard, asserts:

"The outlook for Britain is better than at any time in the postwar years." He could be right—if the government finds the proper combination of tax cuts and investments in modernization. On the other hand, overly generous tax cuts, a niggardly attitude toward investment and a government cave-in to union wage demands could accelerate inflation again and continue industrial stagnation. North Sea oil does give Britain the chance to start the long climb to price stability and high employment—but it would be all too easy for the nation to blow that chance.