§ All this does not, I feel, give a complete picture to enable Parliament to form a constructive judgment of our position and of our financial policy. I would prefer to examine in broad outline the whole financial problem which we have been meeting during the first 18 months of the war. This necessarily takes me to a discussion of what has begun to be called the "gap," though that is a portmanteau expression which bears a variety of interpretations, some mutually contradictory and many not more than partially true. There is, I think, another ambiguity also. In the public discussion of this question, some people would say that there is a gap to-day, and others would say only that there is a gap yawning ahead of us in the future. It is the first of these questions with which I am dealing now; I shall come to the second later in my speech. What is of the first importance is the avoidance of any inflationary gap, by which I mean any inedaquacy in our financial measures below what is required to enable us to avoid serious and continuing inflation.
§ The very fact of war means some rise in costs, through the difficulties in transport and the handicaps which war imposes upon the ordinary functioning of trade and industry. The Budgetary task is to control and to limit any upward movement, due not to those unavoidable causes, but to the pressure of purchasing power on available supplies, and to effect this by measures which, in themselves, may seem hard and severe but which do, in fact, bring benefit, because they avoid for the mass of our people the evil effects, the indiscriminate injustices and the catastrophic burdens imposed by unchecked inflation. To establish the character of the inflationary gap is a necessary preliminary to the determination of the extent to which financial policy, when coupled with the action which has already 1305 been taken in financial and other spheres, has helped and can help to deal with the problem. The first step must be to disabuse our minds of any misconceptions there may be about the size of the gap.
§ In their crudest form such misconceptions relate the gap to the difference between the revenue and the Budgetary total of expenditure, foreign as well as domestic. Without denying that this gap between revenue and expenditure is of importance, if only because it increases the National Debt, it is desirable to remove any lingering doubts that may still exist in any minds on the exact relationship between this gap and the danger of inflation. First of all, I would make two observations of a general character. To begin with, let me emphasise the vital distinction, in relation to inflation, between expenditure at home and expenditure overseas. Even if one leaves on one side at the moment the new factor introduced by American assistance in the form afforded by the Lease and Lend Act, I think the Committee will readily appreciate the distinction which must be made.
§ When we buy munitions of war or other goods in the United States and pay for them in gold and securities, it is true, in general, to say that such transactions do not affect the likelihood or unlikelihood of inflation here at home. In war, even more than in time of peace, we are bound to have a heavy adverse balance of trade with the United States. But for the new form of assistance now to be given, the normal expectation must be that the adverse balance will be met by drawings on our national capital, either by sale of gold or by sale of American securities and investments owned by British subjects or by British companies. The sale of gold, followed by its translation, first into dollars and subsequently into American goods for our war effort, involves on this side of the Atlantic entries in the accounts which are countervailing in character and are not inflationary. Where the dollars are produced by the sale of investments, the process is not quite so simple. In so far as the former British owners of the investments receive payment from the British Exchequer in sterling, it might be suggested that here, at any rate, there was some theoretical danger that such an increase of domestic purchasing power would be of an inflationary character. In 1306 practice, however, it will no doubt be agreed that such payments are normally treated as being of a capital nature, available in this country for investment. With our war-time controls that means, in effect, that they mainly return in one form or another to the Exchequer.
§ Expenditure abroad has been financed hitherto, in the last resort, either by the sale of capital assets in one form or another in the way I have explained, or by the accumulation of sterling balances, held in London by the Dominions and India and mainly available to be lent back to the Exchequer. It must be excluded from the debit side of the national accounts when one is assessing the size of the inflationary gap. It is the balance, that has to be financed by domestic loans or taxation, which counts and, despite a slight inaccuracy of phrasing, I shall, for brevity, call this balance domestic expenditure. It is a travesty of the truth to take for such purposes the ordinary total of Budgetary expenditure, foreign and domestic, and set against such a gigantic total the much smaller contributions derived from purely domestic loans and taxation.
§ That brings me to my second general observation. The inflationary gap is not to be measured by the difference between the total even of domestic expenditure and the produce of taxation. Borrowing as such is neither necessarily nor normally inflationary. In the first 18 months of war Government expenditure was roughly £4,650,000,000. Taxation met roughly £2,000,000,000, and overseas resources met roughly £1,000,000,000. This left a balance of roughly £1,650,000,000. To cover this balance, we had the benefit of substantial current receipts of certain extra-Budgetary funds, mainly the accumulation of the Unemployment Fund and of the Government Insurance Schemes. Secondly, we had the advantage of certain very material sums becoming available for investment because the sums normally set aside by firms and companies to make good depreciation, repairs and renewals of buildings and plant much exceeded the actual making good which was possible at the time. Finally, and most important of all, we have had the new savings obtained by the National Savings Movement, and by other opportunities for investment afforded by the Government. All these are contribu- 1307 tions towards the solution of the real inflationary problem and genuine savings of the kind which I have described are just as properly inscribed on the credit side of the account as the proceeds of taxation itself. The national accounts will always balance, and it is only in so far as they are balanced otherwise than by the results of taxation, plus other Exchequer aids and resources, plus genuine savings, that the danger of inflation will arise.
§ I myself do not believe that it has been sufficiently realised how great a part of total Government expenditure not met by taxation is covered by overseas resources and by Exchequer aids, which may almost be described as automatic in the unusual conditions of war. Judging, as I think a man must judge, by the general signs around me, I do not believe that up to this point the increases of taxation, which all will admit have been very severe, have fallen short of the necessities of the case. I perhaps might mention that, excluding Excess Profits Tax and Excess Profits Duty, the increases in the taxation imposed since 3rd September, 1939, alone equal the total produce of all taxes in 1918, the last year of the last war.
§ Nor do I believe that the difference between total expenditure and Budget revenue has so far introduced inflationary dangers into our system. As I have said, I am coming to the future in a few moments, but, so far as concerns the past and the present, my judgment seems to be fortified by the results of a number of difficult and complicated statistical calculations which have been made available for my consideration. This material consists in part of an attempt made by the Treasury to analyse statistically the sources of war finance and in part of tables of national income and expenditure, which are the very valuable first fruits of our new Central Statistical Office set up by the Prime Minister, an office which now assembles for the information of the War Cabinet and Government Departments regular series of statistics which, though many of them are of necessity secret, are more conclusive than those which we have hitherto possessed. I have decided, after a good deal of consideration, to present to the Committee the statistical analysis to which I have just referred, and it will be available at the 1308 end of my speech as a White Paper additional to the ordinary Financial Statement which is published at this moment every year, and I hope that the Committee will welcome this new departure. It may seem strange that we should publish in time of war fuller information than in time of peace, but for one thing our tasks require a more comprehensive knowledge, and secondly we do know more because a much larger part of the national economic life falls within the purview of Government Departments. In this connection I must guard myself on two points. First, my hon. Friends will understand that an estimate of this character is very technical and presents an unfamiliar appearance. Secondly, while I have thought it right to publish this paper as an additional source of study for those in particular who make a special study of national finance, the publication must not be looked upon as one of a new annual series. Successive publications of similar material would raise questions of high national importance which would have to be carefully weighed before publication could be decided upon.