Britain's lesson for Reagan -- don't cut spending first

There is one very important lesson to be drawn from Britain's experience so far under Margaret Thatcher's government, according to businessmen in the City of London.

If economic recovery is the aim, government's first priority should not be to cut its spending but to boost commercial production -- that is, the output of goods and services that will be bought and sold in the marketplace.

Cutting government spending comes second, they say. Indeed the Thatcher experience suggests to them that unless a boost to production comes first it is next to impossible to cut public spending at all.

In Britain we have heard much of cuts in government spending, but in fact the total is not lower than it was but higher. Only the rate of growth of spending has declined. Meanwhile the market sector of the economy has been allowed -- even cause -- to decline.

One consequence of this has been that the promise to cut taxes has not yet been fulfilled. As a proportion of the gross national product, taxation under Mrs. Thatcher has actually increased. One study puts the rise as from 38.5 percent to 44 percent.

Local property taxes have increased very sharply. Indirect taxes are much higher and are to go higher still. And the prices of home-heating fuels have been forced sharply upward by the government itself.

The economy as a whole has thus been sent into a decline which it will be very difficult indeed for Mrs. Thatcher to reverse. The action required to revivify the market sector of the economy, had it been taken earlier, might have obviated the decline in the first place.

This judgment has to be set against Mrs. Thatcher's considerable success in reducing the rate of rise of prices. And of course the reduction of inflation was her first priority notm recovery.

However, if any practical person here were asked to give one piece of advice to the Reagan administration based on Britain's experience it would be to take all possible steps to reinvigorate "the market" first, before doing anything else.

There's little theoretical advice as to what the best steps would be. Market economist are by nature and conviction inclined to leave the market alone. But business people would probably suggest special incentives for invention, innovation, investment, productivity, job creation, and so forth.

Taxes might well be cut simultaneously, but most Britons by now would argue forcibly that cuts should be made in public spending only much later.

Tackling the problem in the reverse order will throw millions out of work, it is said here. And it is likely to engender an unfortunate climate of opinion which will lead even the least radical and most conservative of people to demand big increases, not cuts, in public spending.

"Why, when there's so much work that needs to be done and so many people out of work," the public will ask, "does not the government step in and arrange for the work to be done?"

But any massive public spending program soon runs into what might be called the Great Barrier, the question "Who's going to pay it?" If the money comes from the taxes the government must tax Peter to pay Paul, so no net extra employment results. If the new money is simply minted and printed, inflation will follow unless there is additional commercial production to match it.m

Thus the Thatcher lesson seems to be to put the market first. Growth before cuts, that's the answer.