The Next-to-Last Defense

Prime Minister Harold Wilson's ninemonth-old austerity program has already cut Britain's trade deficit by almost half (to $72 million a month), but the pound remains very much under siege, and talk of devaluation early next fall still persists. Bankers from diverse parts of the world--Red China, Europe, the Middle East--have been converting their pounds into gold so rapidly that demand for bullion on the London market has soared to a post-Korean War high.

Last week the 21-nation Organization for Economic Cooperation and Development dismissed Britain's export performance as "consistently unsatisfactory." Seeking to calm the foreign fear, Chancellor of the Exchequer James Callaghan unfurled what amounts to Labor's third budget in nine months: a series of tough deflationary measures that stop just short of import quotas, which would be Britain's last line of defense against devaluation.

Cutbacks & Credits. Labor's latest program aims to accomplish three long-sought objectives: reduction of imports, increase of exports, and dampening of inflationary domestic demand.

To stem imports, the government ordered a reduction in the amount of money available for purchases abroad, also stipulated that British importers stop paying in advance for foreign goods. Estimated saving: $126 million a year. To spur British sales abroad, Callaghan said that interest charges for short-term export credits will be trimmed from 7% to 6%; the government will also delay planned construction projects for schools, hospitals, housing and roads--thus bravely inviting a rise in unemployment in hopes of overcoming labor shortages in key export industries, such as shipbuilding. To dampen domestic demand and bring down export prices, the government cut back hard on lending for local public works, also shelved its minimum-wage scheme, postponed promised reductions in socialized-medicine charges and in interest rates for home mortgages, and further tightened consumer credit.

Risky Affair. The new measures were a tacit admission by Labor of what Britain's foreign critics have been saying right along: its previous steps, including higher taxes for consumers, lower taxes for exporters and a 10% surcharge on imports, had been inadequate. Indeed, the latest moves were prompted partly by fear that if there is another pound crisis like last November's, some of the nations that anted up $3 billion to bail out Britain then might not be eager to rescue Britain again. For Labor, which governs by a three-vote majority, the new deflationary steps are fraught with risk. Since taking office last October, the government has scrapped almost its entire program of social change and has taken $2.3 billion out of the economy to defend the pound --on which its political life now hangs.

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