I am delighted and honoured to be asked to address the distinguished gathering at your lunch today. I would like to congratulate you personally on having recently become President of the American Chamber of Commerce in the United Kingdom, your Chamber that contributes so much to the stimulation of trade between our two nations. [end p1]
The Largest Institution of All—the Public Sector
You, Mr. President, are senior director of a company that has devoted much attention to the structure and management of some of our largest business institutions. You will not be surprised, therefore, if I start off today by considering the largest institution of them all, the public sector, and by giving you some thoughts on the development of our economy. [end p2]
All of you share a vested interest in Great Britain. You are here as representatives of American companies who have made investments in Great Britain; as managers and directors of British companies that also have American ties, as residents of our great country.
You must hate to see it in acute difficulties. So do I.
When the Government, of which I was a member, left office in February 1974, the pound stood at $2.30. Today it is $1.65. Unemployment was less than 600,000. Today it is 1,395,000. The index of industrial production was 103.3. In August of this year it was down to 100.8. [end p3]
Those figures speak for themselves and will indicate to you why I have very little to say that is complimentary about the present management of the economy.
None of you has a greater vested interest than I in Britain, in its survival, in its economic rebirth, in its eventual success. [end p4]
Government—the Twentieth Century Dinosaur
The cause of our present difficulties is well charted. Like all western governments, ours has taken onto itself more and more activities, more and more responsibilities.
It has extended its functions into areas where it had no training or knowledge. Long gone has been the role of government as simply to keep the peace without and within, to provide roads, hospitals and schools, and to protect the needy. [end p5]
Instead we have government telling us who we may employ, by how much we may raise wages; how to run our companies; how much we may charge for our products; by how much we may increase dividends and soon, doubtless, what is to be the composition of the boardroom.
And then, having got us in a corner, government may decide to knock us out: to take over our business at net book value, or to compete with it through a nationalised industry subsidized by the tax-payer.
I give you a simple principle. The more government takes on problems it has not the experience to handle, the less effectively it discharges its proper functions. [end p6]
The Age of Growth
Until a few years ago, none of us were too concerned about this trend, and we must all take the blame for that. But we lived in the age of growth when the ability of Government to take on extra duties and to finance them was not seriously questioned.
If the Government had an “overall deficit” , it was in the words of that famous Keynesian, Lord Kahn, “of low significance” .
The trouble is that, when the growth stopped, the spending did not. [end p7]
And you know what happens to companies when they follow that course.
And, of course, when growth stopped, the increased money was not available to government, through savings or taxation, to finance the increased expenditure. So we borrowed. How we borrowed. [end p8]
The New Doomwatch—the PSBR
Mr. President, a few years ago, the words “the public sector borrowing requirement” did not trip lightly off everyone's tongue. The following two sentences were omitted from the press release.
If I had been asked ten years ago what was the PSBR, I might have thought along the lines of BR—British Rail. Ah, yes. Public service on British Rail.
For sometimes, in those years, the deficit did not exist at all. Although the PSBR reached as high as £1,800 million in 1967, in 1969 the government was in surplus to the tune of £460 million. [end p9]
By 1974, however, the PSBR had risen to £6,300 million, by 1975 it had risen to £10,460 million—equivalent to about £8 each week from everybody at work—the forecast for this year is between £11–£12,000 million.
This represents about 9%; of gross domestic product. It is far, far too large a figure. It is an impossible figure.
The reason why the deficit has grown so sharply is set out starkly in the February 1976 White Paper on Public Expenditure. This says: “In the last three years public expenditure has grown by nearly 20%; in volume while output has risen by less than 2%;. The ratio of public expenditure to gross domestic product has risen from 50%; to 60%;. 15 years ago it was 42%;.” [end p10]
Too Few Providers
At the same time, there has been a tremendous increase in the number of those who consume wealth as compared to those who produce it. The following sentence was omitted from the press release.
(A shift from the providers to the absorbers).
In Britain, between 1961 and 1974 employment outside industry increased by over 33%; compared with employment in industry. [end p11]
No other major industrialised country experienced a shift of anything like this dimension over so short a period. In the United States, the shift was 15%;—under half that in Britain.
In Japan it was the other way. Industrial employment increased there relative to non-industrial employment.
Now, of course, some of that shift in employment from industry was into insurance, retail distribution, and banking. But whilst these services increased their employment by 13%; on average in the years of which I am speaking, employment by local authorities rose by 54%;. [end p12]
The Oxfordshire County Council now employs more workers in Oxfordshire than does British Leyland—and yet this is the county in which Morris started.
So here, Mr. President, are the wicked sisters of our economic difficulties—excessive government spending and borrowing; and the switch of labour into the non-market sector.
And the Cinderella has inevitably been industrial investment. [end p13]
Let us take a closer look at investment in manufacturing industry in Britain. Investment is of two kinds. Some investment simply replaces existing plant and machinery. The remainder represents genuinely new expansion and it's the expansion of our industrial base that will really count in the long run.
Now the startling and disturbing fact is that both this year and last, new investment leaving aside replacement investment, is likely to be lower in real terms than it was in 1950—and indeed lower than it was in almost every intervening year. [end p14]
The Long-Term Solution
Now, Mr. President, you will be as familiar with this analysis as I am. The question in your mind must be—what do we do about it?
Keynesian conventional wisdom—monetary expansion, indifference to inflation, the irrelevance of deficits—is dead. But Keynes himself had an insight, almost an obsession, that money was important.
Some of his followers did not. This has led to distressing economic mismanagement in this country. [end p15]
We have very little time left in which to put our house in order. How little is underlined by the appalling money-supply figures released on Monday.
We must accept the discipline of having strict targets for growth in money supply and domestic credit expansion.
Over the years we must balance our budget and match Government spending with income. [end p16]
Over a period public expenditure will have to diminish as a percentage of our gross national product, and public sector borrowing be severely curbed. Last week the British Government was having to raise 20 year money on a 16%; per annum interest ticket. What a ghastly inflationary burden that is placing on the shoulders of our children. [end p17]
As we said at our Conference two weeks ago, the only areas that we would consider sacrosanct from public expenditure cuts are defence, police and the needs of those who are totally unable to help themselves.
But the size of the cuts that is required will not be achieved by “tinkering” with the economy, as Bacon and Eltis called it in their famous analysis. [end p18]
This only leads to de-generation and not to the re-generation we need.
No. Tinkering will not do. We need structural shifts in the economy that will first make full use of the manning and productive capacity that now exists in the private sector and that will then create new jobs within the private productive sector. [end p19]
A Ceiling on Public Expenditure
This can only be achieved by setting an overall ceiling on public expenditure.
We suggested the principle of cash limits in public sector spending I would like to see this principle extended so that there is a thorough check on what is spent by government and local authority departments in strict comparison with the budgets that they have been given. [end p20]
This is a normal discipline in any family or private business.
It is time that it is followed in government.
Mr. President, none of us relish the prospect of cutting public expenditure. It is an unpleasant and difficult task.
The simple fact is that we cannot afford to promise more than we can deliver. We cannot continue borrowing tomorrow's money in order to pay for today's bread and butter. The jam has already gone. [end p21]
Reduction of Public Expenditure and of Personal Taxation.
As public expenditure is gradually but substantially reduced, the next priority must be to cut personal taxation.
Our personal tax rates are far too high, ludicrously high by comparison with some of our industrial competitors. At 35%; we have the highest starting rate of income tax in the world. At 83%; we have the highest top-rate of tax on earned income of all except three countries—Portugal, Algeria and Egypt. [end p22]
We know what difficulties this creates for international companies in bringing management into this country and in keeping trained young men here.
In the Parable of the Talents, I sometimes wonder whether the successful servant who turned his five talents into ten would have bothered to do so if he had been taxed at 83%; on his gain—or indeed at 98%; if the Inland Revenue were to regard the gain as unearned income. [end p23]
Taxes must be lowered in order to create incentive, to encourage risk taking, to allow the eagles to spread their wings.
For too long, the most successful and the most enterprising—those most needed in the country—have been those most heavily penalised.
We have followed to the letter the old Chinese Proverb “the nail that stands up highest invites the hammer” .
New jobs in the Private Sector
As part of this structural shift in the economy, we will wish to create genuine jobs for the future in the private sector. Jobs that make full use of modern machinery and that stand up to International comparisons of productivity. [end p24]
For jobs to be created, the economic and tax climate must be right. Right for small businesses to start up and to grow into bigger businesses.
Right for bigger businesses to get a good return on their investment and to be allowed to keep it.
Some Socialists dream of industry as some Strasbourg goose that can be fattened by having taxpayers' money forcibly thrust down its throat.
Of course, this is not so. [end p25]
Can I remind you what a great political philosopher, de Tocqueville, who will appeal to you as much as to me, once said:
“Do you want to test whether a people is given to industry and commerce?
“Do not sound its ports, or examine the wood from its forests or the produce of its soil.
“The spirit of trade will get all these things and, without it, they are useless. [end p26]
“Examine whether this people's laws give men the courage to seek prosperity, freedom to follow it up, the sense and habits to find it, and the assurance of reaping the benefit” . [end p27]
Relations between Britain and the USA
Mr. President, despite the slow growth of the British economy, U.S. companies have continued to come to Britain and invest here. We welcome and encourage them.
In nine out of the past ten years, U.S. corporations have spent more money in Britain than in any other European country. This is still the case for 1976. [end p28]
This partiality towards the United Kingdom is, in part the result of language and history. U.S. corporations have been investing in our country since the turn of the century. They have built up a good stream of current earnings that can be used to finance new investments.
American Investment in the U.K,
But American companies are also remitting funds from the U.S.A. to invest in Britain. Although the headline in the article in Forbes Magazine which described Caterpillar's new investment in the U.K. was not calculated to please a British heart—it read “Caterpillar In the Land of Nod” —the contents of the article were splendid. [end p29]
Over 20 million dollars invested in a new facility in Leicester, estimated to produce 10,000 fork lift trucks a year, with a high percentage of these going to export markets.
Nor, of course, is Caterpillar the only multinational name to conjur with. Proctor & Gamble, Motorola, Tenneco—to mention but a few—have successful and expanding operations in our country. The following three sentences were omitted from the press release.
The invasion must, of course, not be one way only. You have recently bought the Queen Mary and London Bridge, but we have acquired Gimbels and Sak's Fifth Avenue. If that can be regarded as a swap, I suspect we got the best of the bargain. [end p30]
The Conservatives will develop a climate for industrial growth that the great companies of the World will find attractive. Companies must be able to earn an acceptable profit. Managers must have a fair degree of freedom of action. Above all, those who run the company should be able to take their long term planning decisions without fear that the validity of those decisions will be destroyed either by an unacceptable level of inflation or by a new and contradictory government direction. [end p31]
“Some American Multinationals” it was recently reported “have been rediscovering America” . This sounds like Christopher Columbus getting lost on the way home. But let them be assured that, if they cannot find their way back to New York, Houston or San Francisco, they will be welcome in London, Leeds or Birmingham, to continue to add their wisdom, their skills to the growth of our economy.
Speaking at Roosevelt University in Chicago last September I said that I thought the next 200 years would be marked by Declarations of Interdependence. [end p32] I believe that to be right. What becomes increasingly clear is that, just as the Group of 77 bind together to demand the changes in the international economic order that they seek, so must the northern nations work together.
The Less Developed Countries
Robert MacNamara, in the epilogue to his book “The Essence of Security” wrote “We are beginning better to understand that stability of relationship among rich nations is affected by the stability of the institutions of the poor nations” . This truth is underlined by recent events in Southern Africa. [end p33] Stability is of course aided by development. To bring peace in the world, we, the industrialised nations, have a common duty to help the poorer countries find markets for their manufactured goods and improve their terms of trade, battered as these have been by inflation.
Next month there will be a meeting in Paris on rephasing the debts of the less developed countries. And many other meetings will take place in the months ahead before the negotiating conference in March 1977 on the common fund for commodity stabilisation. [end p34]
There is an urgent need for co-ordination of the positions taken by the industrialised nations at these conferences. I hope that, after your Presidential Elections have taken place, much thought will be given to the development of a united response to the programme put forward by the Group of 77. [end p35]
At a time when the Denis HealeyChancellor of the Exchequer has worn out virtually all the other weapons in his armoury, it is not surprising that the cry goes up for import controls.
We do not wish to see a return to the protectionism and trade wars that characterised in the 1930's.
All too often import controls are used to protect the inefficient. [end p36]
As a Labour Member of Parliament, John Mackintosh, said in the House of Commons last week:
“If we had import controls now on a large scale in this country, it would not be an infant industry argument; it would be a geriatric industry argument” .
But we are concerned that it should be made easier and quicker to prove anti-dumping cases. [end p37]
It can be a laborious business to show that the British domestic industry has suffered material injury from dumped goods.
We have been more generous than other European Community Countries towards textiles from low income countries.
We were quick to allow some Comecon countries to export us under Open General Licence, and we made similar concessions to Japan. [end p38]
In contrast, by the 1974 Trade Act, the US Congress has hardened American attitudes towards imports that are claimed to have been subsidised by the exporting country.
The GATT negotiations
These matters must be discussed with speed at Geneva in the current round of multi-lateral trade negotiations.
I trust that agreement can be reached there on a significant dismantling of non-tariff barriers to trade. [end p39]
Free traders we remain but on the firm understanding that we are as free as other signatories to the GATT.
From all that I have said, you will see that there is no magic or easy solution to our problems. [end p40]
But I am reminded of the remark made by the President of Esmark of Chicago. He commented, when talking about his company's decision to double its $40 million investment in the U.K. “There are too many basic strengths in Britain for it to become the wasteland others see as inevitable” .
Given a reducing burden of public expenditure, given a transfer of resources from paper-pushing to industrial production, given a reduction in the level of personal taxation, then there is hope for the individual in Britain. And once the individual feels hope again, he accepts challenge. And from challenge comes determination to win. [end p41]
Freedom and the Individual
We shall set our course against further state control. In a monopoly, controlled by the State, the individual is diminished. He has to buy what the State offers him. It is to the individual we are determined to return the power of making the choice, even the wrong choice.
That will be a message close to American hearts. You have always been a land of individuals to whom excessive government is alien. We in Britain today echo that feeling. The State, through [end p42] monopoly, coerces man. Freedom, through choice, enriches him.
I do not believe that the care of human life and happiness is promoted in a Socialist economy. I believe that it can be the mainspring of a Conservative Government, dedicated to the strengthening of free enterprise.
And if perchance you should think we have set outselves too great a task, may I reply in the famous words of a former American President:- [end p43]
“In this life we get nothing save by effort; far better it is to dare mighty things, to win glorious triumphs, even though checkered by failure, than to take rank with those poor spirits who neither enjoy much nor suffer much, because they live in the great twilight that knows neither victory nor defeat” . (Source: Theodore Roosevelt. Address in Chicago, April 10, 1899.)