§ Budget speeches fall into a convenient and traditional pattern. It is customary to begin with a review of economic developments in the past year. I propose to do this and to start with the external position. With 50 million people living here upon a small island, and dependent on external trade and confidence in sterling, it is this which is always uppermost in the mind of any Chancellor. I will not weary the Committee with many figures. They are set out in detail in the Balance of Payments White Paper, published last week, and in the Economic Survey.
§ I would say, first, that, up to the middle of last year, the balance of payments was responding well to the measures introduced by my right hon. Friends the Leader of the House and the Prime Minister. The visible trade gap had been reduced and our invisible earnings were going up. As a result, the United Kingdom earned, in the first half of 1956, a surplus of about £150 million on our current transactions with the rest of the world. At the same time, our gold and dollar reserves rose by nearly £100 million, while other countries' holdings of sterling were reduced. Altogether, therefore, we seemed to be recovering fairly well from the difficulties which had arisen in 1955.
§ Now as to the second half of the year. The second half is normally more difficult for our balance of payments than the first; and this for a number of reasons. Our exports and shipping earnings tend to go down. We spend more on foreign travel. The annual payments fall due on our loans from Canada and the United States. At the same time, our friends in the rest of the sterling area are earning less from their sales of commodities. We must expect, therefore, some deterioration in our balance of pay- 966 ments during this period. Even in normal circumstances some loss of reserves is not unlikely.
§ To these seasonal factors must be added in 1956 the events in the Middle East. So far as I can judge, these events in fact affected our commercial position less than might have been expected. Shipping delays distorted the monthly figures for visible trade, but did not appear to affect their average. As recorded by balance of payments estimates, which, of course, deal with payments rather than arrivals, neither imports nor exports altered appreciably in value between the first half of the year and the second. In the invisible account, our net earnings on oil transactions were naturally reduced.
§ On the other hand, the interest payments on the North American loans were,. on this occasion, paid into a special capital account and so did not affect our current balance of payments. In the event, despite the seasonal deterioration and all the difficulties of the Middle East situation, we earned, in the second half of 1956, a surplus of £79 million. This compares with a deficit of £102 million in the second half of 1955.
§ But our problem was not, of course, on our current account. It was not concerned with the underlying strength of our position as a trader. It was a different problem, concerned with our function as banker for a large part of the world. This is, indeed, established by the detailed balance of payments figures which have since become available. These show that during the second half of the year, countries outside the sterling area reduced their holdings of sterling by £84 million, and that there were other large adverse capital movements. It was these factors which were responsible for most of the strain on our reserves.
§ The steps which my right hon. Friend the Prime Minister took are within the recollection of the Committee. We mobilised, with the help of the International Monetary Fund and of the United States, very large dollar reinforcements. We have brought into the reserves only one comparatively small part of them; that is the £200 million in dollars which we drew from the International Monetary Fund in December. Since then, in the first quarter of this year, the reserves have increased without any call being made upon our 967 International Monetary Fund standby or the Export-Import Bank line of credit.
§ This is, of course, a great improvement on the stormy events of the previous quarter, but, even so, our progress has not been all we would have wished. That, in brief, is the story of our external economy in 1956. During the year, we earned a current surplus of £233 million. This was much better than the deficit of about £80 million which we incurred in 1955. Nevertheless, by more exacting standards, we must judge it to be inadequate.
§ This improvement in the balance of payments was a result of policy decisions; that is to say, it was something which we not only set out to achieve but for which we were prepared to pay a price. We took—and we deliberately took— unpopular steps to get it. Put in the simplest terms, we kept the exports rising while we checked imports. The instruments we used were the credit squeeze, deliberately high levels of taxation, and controls on hire-purchase transactions. The price we paid was a check to the growth of total industrial production and of personal consumption. Few men would judge us to have been wrong in thus deliberately channelling our resources into investment and into exports.
§ The statistical story of these events is given in the Economic Survey. It is a story not of stagnation, but of immense variety. Although total production and consumption did not rise, there were wide alterations in the pattern of what we made and what we bought. For example, we bought fewer motor cars and household goods and, incidentally, saved imports of steel in the process. But we bought more food and more clothing, the latter to the great benefit of the textile industry. We built fewer houses, but more factories and offices. We built more ships and made more machine tools, but fewer consumer goods. All these tendencies were at work in different parts of the economy. It is a picture not of industrial apathy, but of a nation girding itself for renewed and greater effort.
§ The year 1956 was, then, a year of considerable activity, but, at the same time, of vitally needed redeployment. The inflationary pressure fell. The number of jobs and the number of men seeking jobs came more closely into 968 balance. A situation of acute labour shortage ended without losing the benefits—social as well as economic—of full employment. The criticism is made that 1956 saw a check in the growth of industrial output, and I want to face that criticism fairly and squarely. In 1955, production was high and the rate of production was growing. But in the process we were bringing imports into the country faster than we could earn the money to pay for them. There was the beginning of a situation similar to that which got out of control in 1951. We had to apply a check.
§
As my right hon. Friend the Prime Minister put it in his Budget speech last year:
I think we have learned this lesson from the events of the past year. We cannot afford to run our economy flat out, with more jobs than men to fill them, more orders than industry can meet, easy profits at home and rising costs … There is really no future in importing extra materials that we cannot afford, in order to turn them into extra goods that we do not export …"—[OFFICIAL REPORT, 17th April, 1956; Vol. 551, c. 857.]
We intended to reduce the pressure, and we did reduce the pressure. We greatly improved the balance of the economy. In the process some potential production was lost, and that was inevitable. It is the difference between driving the machine flat out with the risk of breakdown and slowing it temporarily in order to resume a normal sustainable speed.
§ I would make this further point. While we deliberately used our industrial capacity less intensively in 1956 than in 1955, the capacity itself was growing. It was growing because investment was maintained at a high level. We were building the means to produce more and to produce it for export markets. The process of economic growth cannot be absolutely regular. There will be years of growth and years of consolidation. Our long-term growth will be all the sounder for the consolidation we undertook in 1956.
§ Now, as to costs and prices. What happens to them is crucial to our competitive position and, therefore, to our economic future. This is, indeed, a national rather than a party problem. In both technical and human terms it is the most difficult issue which this country has to face. My right hon. Friend spoke last year about a plateau; and, indeed, 969 retail prices rose only moderately since last April—an increase of about 2 per cent. Taken by itself this is not a bad record. At the worst, it was not more than a gentle slope. In the same period the index of wage rates rose by about the same amount. But since then there has been a settlement on the railways for about 5 per cent. and we all know that other discussions are going on. I do not intend to comment upon them, because that would be quite inappropriate in a Budget speech.
§ I want, however, to comment upon a rather longer view. The truth is—and everybody knows it—that we have all been trying to take more out of the economy than we put into it. Between us all, we have been forcing prices upward, with increases in incomes putting up the cost of living and the cost of living leading to demands for higher incomes. Between 1946 and 1956, incomes per unit of output increased by 50 per cent. In other words, we tried to get half as much again for doing the same amount of work. Is it any wonder that prices rose? Between 1955 and 1956 the nation's total output increased by £1,200 million in money value, but only by £240 million in real terms. We cannot take £1,200 million out and put £240 million in without doing a good deal of damage to our economy and to sterling in the process.
§ What can be done about it? Should we try to hold the spiral by subsidising the cost of living? Should we try to obscure the effect of rising costs by paying subsidies direct or indirect? This process, of course, requires that we should take back from the taxpayer what he is gaining in subsidised prices. As Sir Stafford Cripps found, it is a fantastically costly operation. It introduces a wide range of artificial factors into the economy. Unless it is accompanied by high taxation, it adds to the very inflation it is designed to obscure. When, at last, we find that we cannot afford it and have to modify the subsidies, this process of itself lends force to further wage and other income demands. It is not a policy which I could recommend.
§ What other courses are open to us? There are some who say that the answer lies in savage deflationary policies, resulting in high levels of unemployment. They say that we should depress demand 970 to a point at which employers cannot afford to pay and workers are in no position to ask for higher wages. If this be the only way in which to contain the wage/price spiral, it is indeed a sorry reflection upon our modern society. To slash production, to drive down investment, to push up unemployment to a level at which, despite high world demand, we have manufactured our own depression is, to say the least of it, a high price to pay for price stability. This does not mean that we must drift again into inflation, which puts profits so high and makes labour so scarce that dividends and wages are practically forced beyond our economic capabilities. It does mean that universal and permanent depression should not be regarded as a prerequisite to true stability.
§ But if we are not to rely upon the policies either of subsidy or of all-out deflation, then we must seek a degree of restraint and common sense and recognition of common interest far greater and far stronger than exists today. We must try, wherever we sit in this Committee and whatever part we play in (he economy, whether we come from the ranks of management or workers, to face the realities which now confront us. Many of our competitors, friendly nations with whom we are allied or associated, are practising more restraint, making greater efforts, showing a better realisation of world economic conditions, than we are.
§ This afternoon, I will content myself by saying this. We ought all to ask ourselves whether we have adjusted our outlook to the responsibilities as well as to the benefits of high levels of employment. A money income raised prematurely and beyond the real resources we possess is at best only a partial and ephemeral gain to the man who gets it and it is another blow to those who are living upon fixed incomes. We can earn only what we produce. Yet restrictions on production still exist on both sides of industry. In the difficult times which lie ahead, businesses must be ready to change their methods and their products, just as those who work in them must be not only ready but anxious to seek a fresh approach which is the only way that they can secure benefits that will not turn out to be illusory.
971§ If we are to find a solution to this problem, we all have a part to play—and perhaps some sacrifice to make—management and workers and the spending Departments of Her Majesty's Government. I am sure that no one in this country wants to see our money steadily losing its value or sterling going the way of so many currencies in the past. If we are to find a solution to such problems as these, we must at least have the courage in Government, in management, and in the trades unions to state them bluntly and to be prepared to discuss them fully and frankly with one another. I make no party point of this. If, as a nation, we solve this problem—and we can only solve it together—there is no limit to the achievements which could be ours, under any Government. If we fail, there is no Government of any party that this country has to offer that can stand between us and a drab decline in all our fortunes. The Government have their role to play in grappling with inflation. I shall be discussing shortly the steps they have taken and intend to take. But no Government can solve the problem on their own.
§ So much for the economic events of 1956. It was a year in which, amid many economic difficulties, we did well, a year in which we laid sound foundations for 1957; but a year in which we still did not, as a nation, do well enough to prepare ourselves for the tasks that lie ahead.