Heath's Stage II

If imitation is implied flattery, Britain's Prime Minister Edward Heath must be one of President Nixon's most avid boosters. Conservative Heath, like Nixon, is a firm believer in free markets, and ordinarily would no more care to impose economic controls than offer a Cabinet post to a member of the I.R.A. Yet in trying to fight one of Europe's most destructive price spirals, Heath borrowed openly from the President and last Nov. 6 imposed a freeze on British prices and wages. Until then Britain's inflation had been roaring along at an annual rate of 8.5%. Last week the Prime Minister announced at an unusual "presidential-style" press conference that the freeze would be followed by a program of "Stage II" controls on wages, prices, profits and dividends, supervised by a pay board and price commission. If Parliament approves as expected, these will be the major controls:

WAGES. Beginning March 31, wage increases will be limited to an average 7/4% a year, or roughly half of what they were before the freeze. Individual workers who organize strikes for settlements above the limits risk fines of up to $ 1,000 in lower courts.

PRICES. Britain will introduce a 10% value-added tax on most goods and services beginning April 1, and that national sales levy will kick living costs even higher. Because the government does not want businessmen to raise prices beyond the amount needed for the tax, prices will remain frozen until at least the end of April. After that, increases will be permitted only to cover "unavoidable cost increases." Though no specific guidelines will be created, companies will have to prove that their price rises stem from increasing import costs or pay raises.

PROFITS. Profit margins will be held to the average of the best two of a company's last five years, and increases in dividends will not be permitted to exceed 5%.

Heath faces a much tougher task than President Nixon did in cooling inflation. While most managers backed Heath's latest effort, the Trades Union Congress was quick to attack the price controls as being too weak. Unionists charged that loosely controlled prices would continue to race ahead of their firmly regulated wages. The T.U.C. also voted not to cooperate with either of the new control boards, but stopped short of saying that it would openly oppose them. Without even grudging labor support, the success of any controls program is unlikely.

British consumers are far from happy with the results of the government's policy so far. The annual rate of inflation has been reduced to about 6% during the freeze, but raw food prices have been uncontrolled and are rising rapidly. Because 47% of Britain's farm produce is imported, the government is limited in how much it can control. Since the freeze began, a rump of beef has jumped from $1.63 per Ib. to about $2.18. The price of imported wheat has more than doubled in the past year. On top of this, the country's trade deficit is the biggest since World War II. Sterling has dropped a full 10% in value since it started floating last June; the pound is now worth $2.35. The debasing of the currency is a consequence of the drift that has beset the country since World War II, leaving many of its business leaders defensive and many of its class-conscious workers apathetic, bitter and eager for more pay than their production is worth.

Unless Britain can stop its inflation, the pound's value will drop further in world markets. This could well lead to a string of devaluations by other countries, blunting some advantages that American exporters gained in the last international currency realignment. Yet the deep-rooted obstacles facing Heath and Britain were starkly and ironically underscored last week. After issuing its White Paper outlining the new controls program, the British Treasury was forced to announce that no copies would be on sale in London's official government bookshop. The civil servants who man the shop were on strike.

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