§ I now come to the part of my speech in which I must explain my view about our economic prospects and the policies which I think we should follow. As I am sure my distinguished predecessors in this Chamber will agree, such a task is seldom an easy one because of the mists which are apt to cloud the horizon when we try to peer ahead. It is the more difficult this year because there are two considerations which must be in the front of all our minds. We must succeed in our struggle for stable prices and we must find the right course to pursue in a world threatened by tendencies to recession.
§ Looking, first, at probable developments in the economic situation at home, in spite of some uncertainties the prospects for home demand this year seem reasonably satisfactory. I will deal with demand under the main heads of investment, consumption, Government outlay, stocks and exports. Together, these determine the level of production and employment. As regards fixed investment, we have taken steps, as the Committee knows, to stabilise expenditure in the public sector this year at the same level as last year. Private investment expenditure, so far as can be judged from sample inquiries which we have made, also seems likely to stay at about its present level, which is, in fact, an all-time record.
§ Turning to consumption, there is a special factor at work this year, which reflects to some extent the world situation to which I have been referring, namely, the low level of import prices. This will tend to raise the volume of consumption, by keeping prices—especially food prices—down in relation to incomes. Provided that we maintain our competitive power, employment should remain at a generally high level and this should make possible a moderate increase in consumer spending in real terms.
§ Government expenditure will be about the same as last year in terms of real 49 resources. The level of expenditure all across the front—civil and defence—will continue to be held at the absolute minimum consistent with the execution of our current policies.
§ The remaining component of internal demand is business expenditure on stocks. A good deal has been spent on additions to stocks in the last three years. Now that commodity prices are falling and production at the moment is not rising, there is likely, I think, to be less stock-building this year than last, with correspondingly less demand for home production and imports. Past experience both here and in the United States has shown that fluctuation in expenditure on stocks can play quite an important part in expanding and contracting economic activity. This, then, I would say, is the big uncertainty on the home front.
§ The last component of total demand, in the economic sense, is exports. Their course will depend very much this year on the developments abroad. We must remind ourselves that we are dependent on overseas markets for the sale of nearly a quarter of our national output. So far, foreign demand for our goods has kept up well. But we are seeing to. day something which we have not seen for many years—a halt in the general upward trend of world economic activity.
§ It is right that we should be watching particularly closely developments in the United States. The present recession there is naturally causing a feeling of uncertainty among businessmen everywhere, and particular anxieties to the primary producting countries. Everyone is wondering how deep it will go, how long it will last and whether it will "saucer out", in the apt phraseology of our friends across the Atlantic. No one can tell yet. We must bear in mind that the world economic background is by no means as buoyant as it was at the time of the 1954 recession. On the other hand, the United States authorities are alive to their economic problems and have so far handled them since the war with undoubted success.
Nevertheless, we must take this situation seriously into account both in assessing our own position and in formulating our policies. We must be careful not to do anything to add to world difficulties. At the same time, it is no use our deceiving ourselves into thinking that we can
carry the world on our shoulders or stem single-handed forces which are to only a limited extent within our own control. If we tried to halt a world recession by undiscriminating expansion of economic activity at home we should fail; we could not hope to buy ourselves out of it and we might well come near to ruining ourselves if we tried. As my right hon. Friend the Prime Minister said the other day,
The worst possible solution would be for this country to find itself an island of inflation in a world of deflation.
That is very true.
§ In these circumstances, I will not attempt to forecast exactly how our balance of payments will work out in the rest of this year. But with the terms of trade so much in our favour I have every confidence that our position will remain strong. This does not mean, I am afraid, that we can count on the firm foreign demand for our exports that we have enjoyed almost without a break since the war. Exporting is going to become more difficult. That is why it is so vitally important, in the new circumstances, that we should keep ourselves fully competitive. I cannot exaggerate the importance of that. It is not too much to say that our national livelihood depends on doing so. It will be a fine achievement in the present world situation if we can maintain the volume of our exports. Any serious failure in this direction would, of course, be bound to have a seriously depressing effect on our economy. Incidentally, it is good news how well our cars are selling on the other side of the Atlantic at present.
To sum up the economic prospect, home demand should, on the whole, remain firm. But with our foreign customers running into difficulties, export demand may slacken and this may be reinforced by a fall in business expenditure on stocks. The level of industrial production has tended to decline slightly in the last few months and unemployment has been rising. These trends may well go rather further during the rest of the year, but I do not believe that a sudden sharp recession in this country during the coming months is likely. But this will, of course, depend both on our continuing to follow economic policies 51 appropriate to the circumstances in which we find ourselves and on how things develop in other parts of the world.
Before I come on to our future policies, I want to say a few words about sterling and the sterling area. I recalled earlier the Government's declaration that the strength of sterling remained the primary objective of our economic policy. By that I mean not only a stable value for the £ at home and abroad. I mean the successful working of a sterling area system.
These sterling area arrangements are extremely flexible. The essential features are the use of sterling as a reserve currency by the other countries in the area, the freedom of capital movements from this country to the rest of the sterling area, and the wide and largely unrestricted use of sterling not only by these countries but by many others for trading purposes. These arrangements have proved of immense value in recent years not only to us but to the whole sterling and non-sterling world.
Unless sterling is strong it cannot continue to be the currency which finances a large part of the world's trade. There is no other currency in a position to take its place; nor could one quickly be developed. This is a matter not only of experience, but also of banking connections abroad and the facilities of the City of London. No country is more dependent on international trade than ours; none would suffer more from the lack of a medium for financing it.
It seems rather a pity, therefore, that in recent months voices should have been heard questioning the value of the system and to suggest that in some unspecified way it might be wound up or that it should at least be drastically altered. Admittedly, our reserves are not as big as we should like, particularly in relation to our liabilities. This is, in part, the aftermath of war. But this insufficiency can be exaggerated. The liabilities look big on paper. But we should remember that a large part of them are held for long-term purposes. Provided that confidence in sterling is maintained, only a relatively small proportion will have to be met in the immediate future.
It is also the case that at the present time, temporarily and for reasons partly outside their control, a number of sterling 52 area countries are having to draw down their balances. This puts a strain on the reserves and limits the freedom of our domestic action at home. To a large extent, however, the rundown in their balances is due to a change in the terms of trade. This same change in the terms of trade makes it easier for us to meet the strain. Moreover, the fact that sterling area countries can draw down their balances in bad times, just as they build them up in good times, is a most useful contribution to world liquidity. In present circumstances and in the immediate future this is likely to prove of very great value as a cushion against the effects of diminishing income in those primary producing countries which hold their reserves in sterling.
I hope, therefore, that we shall neither exaggerate the difficulties that come from our position as the banker of the sterling area, nor underestimate its value to us. In a world where liquid reserves in other forms are all too scarce, sterling and the sterling area are indispensable to the smooth functioning of a large part of the world's trade as well as to the unity and strength of the Commonwealth. We do not intend to tamper with this system, which is working well. On the contrary, our purpose is that it shall be preserved and developed, that confidence in its viability should be fortified, and that we shall be able to move gradually towards still wider freedom and, as opportunity offers, make yet greater contributions to Commonwealth development. This all means that we must conduct our own finances with a special caution in difficult times. It requires, too, that we must maintain close and continuous consultation with our sterling area partners. This will be especially reinforced this year by the Commonwealth Economic Conference, in September, and through the preparations for it which are already in hand.
Furthermore, there are the international institutions of which we are members, notably the International Monetary Fund, the International Bank for Reconstruction and Development and the O.E.E.C. These institutions have already accomplished much. I believe that the problem of world liquidity and of ensuring the strongest possible base for the trade of the free world is a matter of increasing importance and urgency. It may well be that a solution can best 53 be found by the steady expansion of institutions such as the International Monetary Fund and the International Bank.
Such a solution would, of course, require the active good will and assistance of the chief creditor countries. It may be that more can be done cooperatively within the Commonwealth. That will doubtless be discussed at the Economic Conference. I can only say that in this vitally important field of the provision of capital and credit for the trade of the free world any sound plans that can be worked out for more effective international co-operation will receive the wholehearted support of Her Majesty's Government.
I will now outline the policies that I think we should follow. At home our first priority must continue to be to win the battle against inflation and our success or failure there will largely determine our fortunes in the months and years ahead. I think that the past six months or more have seen quite a significant change in the temper of public opinion— [Interruption.] I had not finished my sentence—on economic matters. I sense a greater realisation among people generally of the real meaning of inflation and the dangers, the hardship and the social injustice that it entails. There are signs that opinion is becoming less tolerant of the endless spiral process whereby, as a nation, we have paid ourselves in incomes more than we have earned by our efforts. If the experiences of the years since the war have at last spread a wider understanding of the folly of this process, we have made an important advance.
One factor which has contributed to this fuller understanding has been the first Report of the Council on Prices, Productivity and Incomes. This Report gives us an exposition of the facts about movements in wages and salaries, prices, profits and dividends over recent years—hard facts which exist quite independently of the political or economic views of the reader. I know, of course, that everybody does not agree with every opinion which the Council has expressed. It may be all to the good that the report has given rise to lively controversy. The more informed discussion we have of these matters the better. But disagreement with some of the views expressed by the Council does not dispose of the 54 problem. It cannot excuse all those concerned—including the Government—from continuing the search for a constructive solution. By a constructive solution I mean arrangements which will give us reasonable assurance that an expanding economy does not inevitably lead to rising costs and prices as it has done over the post-war years.
The Government's view on wage settlements has been made perfectly clear. If wage increases in general go beyond the national increase of productivity this is bound to damage the national interest. It looks very much as though this fact has been ignored in a number of voluntary agreements within the past few months. It is no use those concerned in industry pressing the Government to follow a firm and consistent line in these matters if they themselves ignore, in practice, the precepts which they urge on others so strongly.
If general wage settlements this year ignore the criterion I have mentioned the only result, in the long run, will be that fewer people will be in jobs, the security of those in employment will be reduced, and the strength of our currency will once more be put in jeopardy. On the other hand, if all concerned show moderation during the next few months, we shall, I believe, have laid the foundations on which we can confidently hope to build a steadily expanding economy, with a stable cost of living and with fairness to all sections of the nation.
In the light of all this it is clear that it is too soon yet to contemplate any general relaxation on the economic front. Although the economy is capable of meeting a higher level of demand this year than is likely to be made on it, we are not in a strong enough position yet to resume a policy of general expansion. In the first place, we have only just emerged from a dangerously strained position. We certainly cannot be sure that we have yet fully attained price stability; and whether we do or not will depend a very great deal on the moderation shown by all concerned in fixing the level of wages and salaries on which our costs so largely depend. In the second place, our external financial position, stronger as it certainly is, is one that still imposes caution. We have had a series of foreign exchange crises, and I am determined to spare no effort to see that we do not have another.
55 Our present policy must, therefore, be to consolidate our improved position. I do not suggest that any intensification of our disinflationary measures is needed. The September measures succeeded in their first object of restoring confidence in the £, and I was able, last month, to approve a reduction in the Bank Rate from the exceptionally high level of 7 per cent. But the moment has not yet come for any general relaxation of credit policy. It is still necessary for the banks to hold the level of advances and for the hire-purchase restrictions to be kept on. The Capital Issues Committee will continue for the present to maintain its critical scrutiny.
That is the position at the moment. But I would like to re-emphasise that, as a Government, we are convinced that the long-term welfare of this country demands a steady expansion of our national economy. That is the objective of all our policies. We shall not, therefore, keep the brakes on one day longer than we must. We dislike restrictions intensely, and we are eager to resume expansion. But the lesson from the past is that as we resume expansion we must do so at a steady pace. There is no salvation to be won through increasing production indiscriminately at any cost. That would land us back in rising prices and balance of payments difficulties. I do not believe that the nation really wants to pay such a price.
In any case, I am convinced that in present circumstances it is not a question of getting price stability at the cost of mass unemployment. Indeed, I am glad to say that I see no prospect of mass unemployment at present. There are many ways in which purchasing power could be quickly stimulated if the general level of demand were suddenly and sharply to fall. The real risk of large-scale unemployment would arise if our currency lost its value or we lost our competitive power to such an extent that we could no longer pay for our food and raw materials. In the meantime, we want to see production and employment just as high as we can, consistent with maintaining the value of our money.
There are some things which ought to have priority for immediate action. It must, for example, be right to make every possible effort to foster our export 56 trade. The Government have been considering whether there are any further ways in which exports can appropriately be encouraged. I have already referred to the Commonwealth's sterling balances. As far as these are run down that should help both to maintain the level of development in the countries concerned and to benefit our export trade.
We have recently undertaken a detailed review of the facilities provided for our exporters by the Export Credits Guarantee Department. Our broad conclusion is that our export credit insurance service is as good as any in the world, and that there is no need, in present circumstances, to make any substantial change in the terms or period of insurance cover which the Department, on the advice of its Advisory Council, is prepared to give. My right hon. Friend the President of the Board of Trade will be making a more detailed statement about this later in the debate.
I emphasise "in present circumstances". We do not want to start a race in credit-giving, but if our competitors were to push the credit terms for a particular type of export beyond those normally insurable and our exporters found themselves excluded for this reason from business, we would be bound to consider extending our cover, too, in the field of trade affected.
We must also be ready to meet the possibility that the level of world trade may continue to fall. In this event the buying power of our customers and industrial activity in this country might be so affected that we would be ready to use the other powers which exist in Sections 2 and 3 of the Export Guarantees Act outside the normal insurance scheme for offering economic assistance to Commonwealth and other overseas countries and to maintain export activity here. This might well involve the provision of guarantees or finance over longer periods than at present.
It is impossible to formulate now a precise policy to cover hypothetical needs and conditions in the future. What is clear is that these other powers in the Export Guarantees Act might be used in the event of a major reduction in world trade involving a pressure on the available currency reserves of those with whom we trade. This, of course, would involve an additional claim on our resources, and 57 the amount which we could devote to these activities would have to be balanced against other claims at the time.
Then there is home investment. I have already mentioned that total investment—public and private—is likely to remain at around the high level of last year as regards actual expenditure during the coming months. But, as we all know, investment projects take time to mature and turn into actual expenditure.
As regards public investment, the existing tight restrictions on expenditure by central Government, local government and nationalised industries are flexible and can and will be modified or relaxed at any time when the moment seems right. There will be no lack of candidates for relaxation, and there need be no delay.
In the private sector, as I have said, it looks as if about the same amount of investment will be carried out this year as last. But we do not want a gap to develop, and I hope that those who are planning for the future will continue to do so with steady confidence.
I mentioned, at the beginning of my speech, that the need for caution generally should not make us overlook the problem of patches of severe and persistent unemployment. This is an intractable problem, but it is the Government's firm resolve to tackle it with the greatest energy from both ends—endeavouring to bring work to the worker and, when that is not possible, helping the worker to move to where work is available.
We have two steps in mind in this connection which I would like to tell the Committee about. First, I am confirming to the Capital Issues Committee and to the banks that the Government would not wish any projects for sound developments in areas where unemployment is substantially above the average to be held back by lack of credit or finance.
I have also informed the banks that I will regard advances made for this purpose as excluded from their promise to do their best to hold the general level of bank advances. This puts such advances on the same footing as medium credit for exports. Secondly, the Treasury already have powers, under Section 4 of the Distribution of Industry Act, to give financial assistance mainly by loans to industrial concerns in Development Areas. The present areas of above the average unemployment are, however, 58 mostly outside the present Development Areas.
The Government have authorised my right hon. Friend the President of the Board of Trade to introduce an amending Bill. This will enable the Treasury to give financial assistance provided under the Distribution of Industry Act to a trade or business, if the purpose for which the finance is required is likely to raise the level of employment in a locality in which a relatively high rate of unemployment exists and would otherwise be likely to persist.
The Committee might be interested to know of one type of case in which we need not wait for new powers. The Government are ready to make finance available under Section 4 of the Distribution of Industry Act to assist in the provision of dry docks in Development Areas, if appropriate arrangements can be made for proper contributions from the enterprises themselves and from non-Government sources. The reasons are twofold. There is a grave risk of a shortage of dry-dock accommodation, in particular, accommodation for the larger tankers and other vessels which will be coming forward in increasing numbers in the next decade; and there is substantial unemployment in several places where dry docks have from time to time been projected. I hope that this assistance will prove practical and useful.
In regard to unemployment generally, I only want to say this. It may sound as if my unwillingness to put expansion of production before everything else at any cost means that I regard unemployment as of no great importance and as a low price to pay for the success of an economic policy. That is not my view. I have always considered that the persistent lack of a chance of a job for a person who wants work—as most people do—is one of the most soul-destroying hardships one can imagine. I could, therefore, never be associated, any more than I know any of my right hon. Friends could be, with an economic policy which did not have as one of its main aims the provision of regular productive employment for all who are able and willing to work. It ought to be—and, indeed, it is—our continuous aim, as experience gives us a better understanding of the forces at work, to see just how near we can get to this objective without losing 59 price stability and putting our balance of payments and our reserves in jeopardy.
To sum up our policies, the four priorities we should set before us are clear. We must make sure that our economy is strong and sound so that it can stand up in whatever weather lies ahead. And that means we must put first the maintenance of the value of our currency and our competitiveness as exporters. We must maintain a high rate of savings and investment, for on that our national future depends. We must make sure our economy is not only sound but fair to all sections of the nation. And we must continue to reduce, as opportunity offers, the heavy burdens of taxation. That these aims can be achieved, I have no doubt whatever. But they only will be if the nation as a whole means them to be. The present time is a critical one. If all of us were to press our own sectional interests to the exclusion of the nation's interest then, let there be no doubt, we should lose all and be back in deep and dangerous economic trouble for which we should have no one but ourselves to blame.