§ When we come to consider, as we must, the degree of inflationary pressure which today exists in our economy, we enter the most difficult field of economic analysis. It is not possible to give any accurate answer to the question: "How much inflation is there?" Nor is it easy to find remedies to deal with the situation. Indeed, inflationary pressure cannot be removed entirely by Governmental action unless we are to envisage a degree of economic control which is too rigid to be operated in a democracy, and would defeat our aim of getting away from detailed controls as rapidly as possible.
§ As to the facts, there can be no doubt that during last year many signs of inflationary pressure were to be observed. The demand for labour and materials was excessive throughout industry; costs, profits, and wages rose all through the year; the pressure of the black market continued in certain spheres, and we experienced great difficulty in devoting 48 sufficient of our resources to those types of production which were the most urgent for the country but not necessarily the most profitable or attractive to the producer.
§ And yet during 1947 we had an overseas deficit of £675 million, which meant that we had that extra volume of goods available to us in excess of our own production. In 1948, we plan to reduce that excess very substantially, depending to some extent upon the outcome of the European Recovery Programme. This means that there will be an increase of inflationary pressure to the extent of the difference between the amounts of the excess imports in the two years respectively. To set against this we have the reduction in capital investment consequent upon the plans of last autumn.
§ There will, therefore, almost certainly be a net increase in the inflationary tendencies this year as compared with last year. This problem of removing the inflationary pressure is not by any means the only one affecting the Budget, though it certainly is the most immediately important. There are two ways, as I have already stated, by which the inflationary pressure can be reduced—voluntary withholding of spending and Government taxation.
§ The mere fact that there is a Budget surplus, according to our traditional form of account, does not mean that we are thereby reducing inflationary pressure by the amount of that surplus. Last year there was, as the Committee knows, and as I will explain in detail in a few moments, a large Budget surplus, and it was in fact rather more than sufficient to secure that the money collected by taxation, with other Government revenue, defrayed all the Government's expenditure of every kind, omitting, of course, the Sinking Fund. I am not advancing any view that this is a test which ought necessarily to be applied year by year in judging the adequacy of the Budget. Much of the Government's capital investment which is of the highest priority should, in normal circumstances, properly be met from savings, that is to say, by borrowing rather than by taxation, but in this present inflationary condition a different and more stringent test is required.
§ Indeed, it is clear that despite the large surplus on last year's Budget inflationary pressure has not yet been decreased to 49 any marked extent. In view, therefore, of the factors I have mentioned, which will tend to increase inflationary pressure this year, we must secure an exceptionally large Budget surplus, big enough to yield a balance after all forms of Government expenditure have been met. We cannot, I think, rely upon any substantial increase in private savings; to do so would be highly speculative and quite unsafe, though we shall certainly hope that their volume will be at least maintained at last year's figures. On the other hand, we are certainly looking for an increase in production, through greater effort, higher efficiency, and continued mechanisation; and we want to do all we can to encourage that increase.
§ The Budget must, therefore, to fit in with the economic plan set out in the Survey, have two main objectives—first, to obtain, with an equitable distribution of the load of taxation, a real and substantial surplus, which more than provides for all Government expenditure, capital and current, and leaves over a balance, to be used to counter the inflationary pressure; and second, so to adjust taxation as to encourage production, by providing a better incentive to producers. This sets a difficult task, because, as I have said, no one can assess with any certainty the present degree of inflationary pressure or define with accuracy in which part of our economy it is strongest. My proposals, when I come to them, may be criticised as doing too much or too little.
§ We must always remember that one of the factors in inflation is the state of mind of the community as a whole, and if this altered we might find ourselves in a very changed situation. I hope that my proposals will prove sufficient, without weighing unduly heavily upon the taxpayers; but we must watch the situation carefully, and be ready to detect the moment when the inflationary pressure vanishes and gives place to deflationary tendencies; if such a thing should happen, we must then make a rapid readjustment of our economic and financial policies.