§ 3.40 p.m.
§ The Chancellor of the Exchequer (Mr. R. A. Butler)
As has been announced, our first business must be to deal with the economic situation, and as we are in Committee of Ways and Means it will be clear to hon. Members that I have a variety of measures, including fiscal proposals, to put before the Committee. These Her Majesty's Government judge essential if we are to tackle the present situation thoroughly and effectively. The fact that my speech will include budgetary matters may lead hon. Members to think that things are more difficult than they had imagined. Actually, there has been a distinct improvement during the past month. Since I spoke at Istanbul at the meeting of the International Bank and Fund in the middle of last month, sterling, I am glad to say, has strengthened; the loss of reserves has been effectively halted, and our current deficit in the European Payments Union has been greatly reduced. Moreover, the September trade returns indicate that the gap between our export and import figures has been narrowed; and during 1955 the terms of trade have moved rather in our favour than against us.
What, then, have been the causes for our anxiety over this long summer, and why is further action needed now? Since the last Budget, over six months ago, rumours and speculation arose in July about the future parity of sterling and the margins within which it might move. This was largely due to the discussions in Paris, in June, on the subject of a European clearing system. These discussions were necessary in order to secure the renewal of the E.P.U., and to preserve the invaluable co-operation of the European nations in O.E.E.C. This uncertainty coincided, however, with a second and separate factor—the emergence of a significant degree of internal inflation, due to wage claims and rising personal incomes—[HON. MEMBERS: "Oh "]—to increased 203 spending on both consumption and investment, and to industrial unrest, in which the effects of the dock strike should not be underestimated. Altogether, there has been shown to be excessive demand for our limited supply of labour and material. These two influences, the rumours and uncertainty and the emergence of a degree of internal inflation, of course, reacted one on the other, and the reserves suffered some losses.
But a plain statement of our policy towards sterling—and I have nothing to add today to what I said at Istanbul on that subject—has altogether improved the standing of sterling, in so far as it was threatened by doubts about our exchange policy. That, the Committee will realise, is eminently satisfactory. Some people may, therefore, be inclined to ask whether we could not wait till the next Budget to take further action against the internal inflationary pressure. This would be a much easier and much more comfortable course than taking steps at once. But this Government are determined to restore the balance of the economy without delay, so that we may rebuild our reserves and create a firm basis for future forward moves in national policy. Thus we shall consolidate sterling's recent recovery and take advantage of the opportunities which world trade offers us.
I discussed all this with the Commonwealth representatives at Istanbul, where my public assurance that further action was imminent did much to re-establish confidence, and I am quite clear now where my duty lies—[HON. MEMBERS: "Resign."]—namely, that we must take further action, and take it now. We shall be moving in company with the Governments of Australia and New Zealand within the Commonwealth. These and a number of other countries have been suffering from troubles somewhat similar to our own. [Laughter.] While the Committee may be entertained, it will observe that somewhat similar restraint is being applied in the United States and Western Germany, and we have recently had an example in Holland.
Let us be clear, at the outset, that the problems which we in Britain are facing are not problems caused by a slack or enfeebled economy. We are moving on the tide of a vigorously growing expansion, which is outstripping the resources available to maintain its strength. 204 Twenty-five years ago John Maynard Keynes said,We are suffering not from the rheumatics of old age but from the growing pains of over-rapid changes.That statement is equally true of our situation today. I do not doubt that, had he been with us, Keynes would have noted and prescribed for the symptoms of over-ebullient prosperity, just as he diagnosed and treated the indications of underemployment in his day.
In addressing ourselves to the cause and cure of our growing pains, we must reflect that we have not experienced the problems of a free economy for some seventeen years; secondly, that we have taken on many and varied overseas burdens far greater than many of our competitors, such as Western Germany, and thirdly, that we are sustaining, and mean to continue to sustain, a system of social services which is the envy of the world. In view of these three postulates which I have laid down I have made it clear that, in my view, the problems of the British economy demand a dual policy, combining both incentive and restraint. We need, and have needed, incentive to secure the maximum expansion of production and employment at home and I presume that hon. Members opposite will not laugh when they reflect on the fact that during the last four years we have maintained what may now be said to be the fullest employment we have known in the history of this country. We need restraint to enable us to combine internal expansion with external solvency, and to ensure that the demand which results from full employment—and many people have not thought this out sufficiently—does not imperil our balance of payments or prevent us from honouring our manifold commitments overseas.
We have had both these considerations in mind during this year. In February, when the first signs of serious strain appeared, we took action by raising Bank Rate to 4½ per cent., and by reimposing a moderate degree of restriction on hire purchase transactions. At the time of the Budget, in April, I could point both to the strengthening of sterling and to the improvement in the reserves which had resulted and I am ready, on a future occasion, when I shall be really controversial, to answer any technical point raised this afternoon. Although I can point to an improved and strengthened 205 sterling and the improvement in the reserves position, I warned the Committee—these were my words—that it wouldnaturally take some time for the effects of Bank Rate and of the tightening of credit to make themselves fully felt on our balance of payments."—[OFFICIAL REPORT, 19th April, 1955; Vol. 570, c. 40.]I then examined the probable trends in both demand and production as they could then be foreseen.
With all the evidence and advice at my disposal, and after deciding to hold about half the prospective surplus in reserve, and taking into account, as I thought, the probable effect of the tighter credit policy, I proposed those incentives which I thought most calculated to encourage higher productivity and output.
Looking back, what analysis can I make? It is as follows. With the single and disquieting exception of coal, my confidence in our ability to increase production has been fully justified. So far this year, industrial production has been running between 5 per cent. and 6 per cent. above the corresponding period of last year, thus maintaining the momentum of the expansion of the last two or three years. Our exports have improved, and there is a generally high level of activity and well-being in the country. So much so that some people may find it hard to understand why, with full employment and better rewards, there is any need for remedial action to be taken. But the truth is that, while the incentive side of our policy has worked to the advantage of the country as a whole, the disciplinary side, in the form of the restriction on credit—of which we had little practical experience in conditions of full employment when the trend of consumption and investment was rising, which was opposite to what was happening when I applied it on first taking office—has proved to operate less rapidly than we either expected and intended. That was the reason—I am trying to put the situation clearly before the Committee—for the further measures which I introduced on 25th July.
We cannot be certain as yet, how far the various restraints which we have progressively brought into force during the year are exerting, in their totality, their effect on the economy. Bank advances generally are gradually falling; the trade gap is becoming rather smaller; and, as 206 I foretold in the Budget—and my calculation was correct—there has recently been some slowing down in the rate at which personal consumption has been growing. So my forecast of both production and consumption in the Budget, I claim, was correct. But I am conscious of too many signs that, before the original pressures have been sufficiently checked, new pressures may develop to reinforce them. Here are some of the indications. Let us take, first, the unsatisfied demand for materials and labour, which has been marked throughout the year, and which still persists. In spite of new production records, we are faced with a shortage of steel, and of other essential materials; and we are managing to overcome these only by additional imports. And these are significant figures. For every individual unemployed there are now more than two vacancies notified to employment exchanges. Whereas, in Australia, the Prime Minister has explained, in introducing the measures himself in the absence of the Treasurer, that it is personal consumption which is running at too high a level, in the United Kingdom the excess of demand is showing itself not only in terms of personal consumption but also in a tempo of new investment which threatens to outstrip the growth of our resources.