Toward Deflation?

In the days when the Royal Navy ruled the seas and marmalade was king, so much wealth flowed so steadily into Britain that even the waves seemed to pound in sterling. Times have changed, but habits have not. Ever since World War II, Britain has been living far beyond its means, and government after government has experimented with emergency measures to fend off disaster.

When Harold Wilson took over as Prime Minister last October, he was immediately confronted with the same old crisis. Out the window went his glittering plans for a free-spending dose of additional socialism. The gold and currency reserves were down to $2.4 billion, barely enough to cover Britain's soaring trade deficit, and international confidence in the pound was sinking fast. To stave off devaluation, Wilson was forced to float a $3 billion emergency loan abroad and slap an unpopular surcharge on imports. But that was just the beginning. Last week Wilson's Chancellor of the Exchequer, James Callaghan, appeared in Parliament to read the annual budget report --and deliver the main blows.

Moors to Let. To cut the equivalent of $280 million a year from the outflow of sterling, Callaghan slapped sharp controls on currency exchange to discourage British investment overseas and limit foreign-travel expenses to $700 per trip. A second major goal was to take $700 million a year in purchasing power out of the inflated economy--mostly by taxation. Stiff new sales taxes raised whisky by a whopping 560 a bottle, a pint of beer by a penny, forced cigarettes up to 750 a pack. A new corporation tax was in the works, and a 30% tax was put on capital gains--which have never-been taxed before.

Risking labor unrest, the government canceled the $2 billion project to build the controversial TSR-2 atomic bomber, announced that it might buy the cheaper American F-111A instead. To businessmen, the unkindest cut was the virtually total abolition of the tax-deductible expense account--which, charged Callaghan, "has grown to such a pitch that luxury flats are kept on expense accounts, yachts are hired, and Scottish landlords can turn a penny by letting their grouse moors."

SCROOGE CALLAGHAN, headlined the Daily Express. "An out-of-date socialist budget dictated by petty political prejudice," decided the Tory Sketch. But there was support as well. "Everyone knew it had to be an unpleasant budget, and it was," allowed the Conservative Daily Mail. Wrote the Mirror's pro-labor columnist, Cassandra: "James Callaghan held our noses and gave us the nasty medicine. We swallowed, grimaced and said, 'You blighter. Damn you. Don't try that again.' Then when he wasn't listening, a lot of folks said, 'Well, I suppose we had it coming.' "

Side by Side. Although Callaghan stepped hardest on the toes of the rich, the measures he laid out were straight from the book of conservative economics, and it was ironic that members of the banking community and hard-line socialists found themselves cheering side by side for deflation, sales tax and reduced government spending.

Wilson might not be as roundly cheered among rank-and-file voters. Although he has only a three-vote margin in Parliament, recent public polls have indicated that if he were to call an election in June he might increase Labor's majority by as much as 100 seats. Wilson may think twice before trying it, for his harsh budget makes an election a far riskier proposition.

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