No Longer the Sick Man

Pale spring sunshine glowed on the House of Commons' oak paneling last week as Chancellor of the Exchequer Roy Jenkins rose to start the annual spring rite of Budget Day. It was a twitchy moment for the British, who look to the budget for both a review of past economic performance and word of the government's future policies. In too many years since World War II, the budget has brought higher taxes, tighter credit and myriad other measures designed to solve Britain's chronic balance of payments problem. This time Jenkins offered much hope--and some relief. He could well afford what he termed "cautious optimism."

When Jenkins outlined the government's forthcoming economic policies in the budget speech, TIME Correspondent Patricia Delaney reports, his tone was expansive, yet not completely openhanded. He retained most of the restrictions on consumer spending--curbs that are designed to stimulate exports and buttress the balance of payments--but he cut from 40% to 30% the deposits that importers must make when they place orders. He reduced the basic bank-lending rate by half a point, to 7%, and demolished the 2 1/2-year-old ceiling on the amount of bank loans. In addition, the government will trim taxes, particularly for the poor and the elderly. About 2,000,000 of Britain's 21.5 million taxpayers will be removed from the tax rolls and another 15 million will enjoy reductions. This news was so startling that Tory Opposition Leader Edward Heath offered barbed congratulations: "We have witnessed not quite a unique event but a very rare event--a Socialist chancellor who has actually announced a reduction in taxes."

Surplus for Solvency. Jenkins could afford the gesture. His budget showed further evidence of a dramatic turnaround in Britain's fortunes. The payments balance had swung from a horrendous deficit in 1968 to a handsome surplus in 1969. The basic surplus in 1969 was $929 million, the highest ever recorded. Furthermore, in the year's last nine months there was a favorable balance on "visible trade"--the import and export of goods. Britain has earned visible surpluses in only two years since 1822, relying traditionally on "invisibles"--earnings on overseas investments, services and tourism--to cover its trade gap. Clearly, the country has taken a major step toward solvency: in the past 15 months, Britain's short-and-medium-term foreign debts have been halved, from about $8 billion to less than $4 billion. With justifiable pride, Jenkins called Britain's payments situation "one of the strongest in the world."

Still, it is premature to talk--as do some ebullient politicians--of a British economic miracle akin to the German Wirtschaftswunder. Britain has merely won breathing space. Since World War II, the twin costs of vestigial great-power commitments abroad and a welfare state at home have consistently overburdened the economy, restricted successive governments' freedom of maneuver and earned Britain the epithet, "Sick Man of Europe." Now Britain is buoyantly convalescent, but it could still shudder into a relapse. Ironically, it fell to the Labor government of Prime Minister Harold Wilson to apply the necessary conservative measures: lower public expenditures at home and an end to many commitments overseas.

The country has paid dearly. To achieve the payments surplus, the British have sacrificed economic growth, which has been running at an annual rate of only 2%. They have also held down industrial investment and allowed unemployment to rise to 2.7%, which is high by British standards. Those measures reduced domestic demand, thus forcing manufacturers to export more. The basic consumer demand remains; as taxes and interest rates move lower, it could spurt again.

Clamorous Claims. A test of political courage and economic wisdom lies ahead. Last week's budget enhanced Harold Wilson's chances of winning the next election, which the government must hold within the next twelve months. Now he and Jenkins have to get the economy moving again (but not too fast) and resist clamorous demands for still lower sales taxes, higher pensions and other benefits.

Britain's new economy is also threatened by an explosive rise in wages. Ford recently granted its workers an immediate 18% wage raise; Kodak granted 15% and merchant seamen have been offered 20%. Such increases, if not accompanied by commensurate gains in productivity, will soon dull the competitive edge that Britain achieved over other exporting nations when it devalued the pound in 1967.

Contrary to popular belief, however, Britain loses fewer man-hours per worker from strikes than the U.S. and most Western European nations. Still, wildcat walkouts by a handful of key men often cripple whole industries and account in large part for British companies' notoriously late deliveries of orders. The wildcats are free to run because labor contracts are not legally binding; government attempts to impose order on that anarchy have been frustrated by union resistance.

Going to Market? For all those weaknesses, few economists disagreed with Roy Jenkins' summation last week: "We now have an opportunity such as has not occurred for a good many years past to set the economy on a path of sustained and accelerating growth." Britain's move toward growth could have important international consequences. U.S. companies can expect rising profits from their large investments in British business. The strengthening of sterling takes some pressure off the dollar in world money markets. On the Continent, France can no longer cite the economic frailty of Britain as an excuse for blackballing it from the Common Market. If the strong economic performance continues and Prime Minister Wilson is really serious about joining, he could enter the negotiations from a position of power.

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