UK: Squeezing inflation - a cure more damaging than the complaint. (1 of 2)

UK: Squeezing inflation - a cure more damaging than the complaint. (1 of 2) - If it is not hurting it is not working was John Major's watchword as Chancellor. But by putting the squeeze on industry the Government may be pushing it into a recession that e

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Last Updated: 31 Aug 2010

If it is not hurting it is not working was John Major's watchword as Chancellor. But by putting the squeeze on industry the Government may be pushing it into a recession that erodes its capacity to compete. Roger Eglin.

A year which began on a high note of optimism has closed in deep gloom. The growing list of corporate bankruptcies, the fall in output and manufacturing investment and the collapse of business confidence have raised painful memories. A decade after Geoffrey Howe squeezed industry into one of its worst ever recessions, the Government is close to replicating all the brutality of that squeeze.

Like Margaret Thatcher, John Major is trying to squeeze inflation out of the economy. That squeeze was justified on the grounds that it was a necessary corrective. Industry had become inefficient compared with the foreign competition and was continuing to fall behind.

In many ways it did the trick. A more reasonable mood emerged on the shopfloor. Some considerable stories of corporate recovery have emerged during the latter part of the 1980s. Rover, British Steel and British Telecom, once bywords for inefficiency and losses, have transformed themselves. We greeted with euphoria the wave of takeovers made by British companies in America during the 1980s. As the likes of Beazer, BP, BTR, Grand Metropolitan, ICI and Hanson struck deep into the heart of corporate America, the assault was seen as the reflection of the new-found vigour in the British boardroom.

The excitement which greeted this turnaround was forgivable. But was it premature?

The reality is that the revival, welcome though it was, is no guarantee that this country has managed to claw its way back from the third division of industrial powers. All the evidence is that there is still a long way to go. One reason for mounting another squeeze was the increasing trade deficit. An argument for this is that the loss of manufacturing capacity as a result of the Howe squeeze has left industry unable to meet all of the demands of the domestic economy. This may be so. But the likelihood is that much of this capacity would have been eliminated anyway in the face of growing international competition and would have made little difference to the struggle to narrow the trade gap.

When the latest squeeze got underway the Government argued that the aim was to cut back on domestic consumption and expressed the hope that industry would maintain output by stepping up exports. There was no intention of repeating the shock treatment of the Howe squeeze. For a short spell it was possible to argue that the strategy was working. Export volumes were growing and there were signs that Britain's share of manufactured trade was recovering. But progress began to slow. Nor was it helped by sterling's strength.

It is now clear that former ministers like Lawson and Howe argued for an early entry into the European exchange rate mechanism. This did not happen and the Government is left with the classical stop-go dilemma. If Chancellor Norman Lamont eases policy too much, domestic demand expands and with it the trade deficit. But if he keeps a tight grip he will once again start to cut into the manufacturing base and industry's ability to compete against imports.

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