................................................................................ ON THE RECORD ECONOMIC DISCUSSION RECORDED FROM TRANSMISSION BBC-1 DATE 31.1.93 ................................................................................ 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.