§ This is, indeed, a difficult moment at which to read confidently the barometer of world trade and economic activity. It is clear that the economic climate of the free world is changing. Inflationary pressures are subsiding and in some countries production has fallen off. The question is, does this portend only a pause, soon to be followed by a renewal of the upward trend, or are we at the beginning of a more protracted downward movement?
§ It is too soon to be sure. But of one thing, at least, we can be certain. Whatever the outcome, our policies must be guided by three dominant objectives: to maintain the value of our currency; to strengthen our external finances by increasing our reserves or reducing our liabilities, or both; and to play a part, consistent with our resources and responsibilities, in the expansion of world trade and in the development of the Commonwealth. Our strategic aim must always be steady expansion, though tactics may 38 sometimes dictate a pause. These are the thoughts which have been uppermost in my mind while I have been working on this Budget, and they are the threads which bring together our present policies and my proposals for the future.
§ I want to describe shortly, first, the course of economic events over the past year and to give my impression of our present state of economic health. I see a number of heartening signs that it has improved. Looking first at the situation at home, although the growth of production was small in 1957, there were some satisfactory shifts in the use which we made of our resources. For example, Government expenditure on goods and services fell slightly in real terms. Consumption rose by about 2 per cent., which was reasonable considering that it had not risen in the year before. The rate of personal saving reached the record level of 10 per cent. of income after tax. This is satisfactory and encouraging and something from which we shall benefit in the future.
§ The lion's share of the increase in output went to investment, which is again important, both in stocks and fixed capital. In 1957, the rate of fixed investment rose by 5 per cent. in real terms. Over the past five years, the proportion of the national product devoted to fixed investment has risen from 14 per cent. to 17 per cent. These are all signs of growing economic strength.
§ The excessive pressure of demand has perceptibly relaxed over the past year. Although we are still fully employed by any normal standard, there is rather more unemployment than a year ago—2 per cent., compared with 1.7 per cent. in March last year. There are also fewer vacancies than a year ago. I know very well that statements about the high level of employment over the country as a whole carry little comfort in those particular places where the percentage of unemployment may be several times greater than the national average. Local pockets of above the average unemployment must be tackled with all possible energy, and I shall say more of this later. But they must not cause us to lose a sense of perspective when we are scrutinising the whole picture.
§ So far, I have mentioned the favourable signs. But there is, of course, another side to the picture. Costs and prices 39 again proved to be our Achilles' heel. Comparing 1957 with 1956, the price-level of output as a whole was 3 per cent. up, with retail prices 3½ per cent. higher. Once again, the chief cause was that wages and salaries went up much faster than output—6 per cent. compared with 1½ per cent. Profits rose on much the same scale, although their effect in the aggregate on prices was, of course, much smaller. These figures are important because they explain our failure as a nation to halt inflation last year. And most of our present economic worries stem from that fact.
§ I am glad to say that in several important respects recent months have shown greater stability. The retail price index has remained steady over the past five months and wholesale prices of manufactured goods have also been stable. It may be that the retail price index will go up slightly during the next few months, but the prospects generally there are bright. At present, the terms of trade are exceptionally favourable to us. Import prices are 11 per cent. lower than a year ago, while export prices have so far not fallen. We now have a golden opportunity, therefore, at least to halt, and possibly to reverse, the trend of rising prices from which we have suffered for so many years. We cannot count on the terms of trade remaining so favourable to us for very long and this makes it all the more important that we should make full use of this opportunity.
§ Turning to the external side of our affairs, our trading position was adversely affected during the first part of last year by the aftermath of the Suez trouble. Over the year as a whole, however, we had a substantial and encouraging current surplus. Indeed, it is probable that the published figure of £237 million is, in fact, an underestimate, since some of the very large receipts during the year which cannot be identified are almost certainly attributable to current transactions. But one must remember, again, that this surplus was helped by the very favourable movement in the terms of trade in the later part of the year.
§ As hon. Members will know, the monthly trade gap in the last few months has been considerably reduced, mainly as a result of the big fall in import prices. Our exports, however, have recently levelled off after a long period of steady 40 growth. This, of course, is an unwelcome result of the more difficult conditions in overseas markets, caused by the check to the growth in industrial expansion in the United States and elsewhere. But as recent experience has shown, we can earn a current surplus big enough to provide for our long-term normal investment and still find ourselves with serious problems for sterling.
§ I am not going to trouble the Committee with a full exposition of the complexities of the overseas capital account, but the broad story can be put quite shortly, I think. Both in 1956 and in 1957 our surpluses on current trade were sufficient or more than sufficient to cover our normal long-term overseas investment. However, in both years there were very large reductions in the sterling holdings of overseas countries—over £150 million in each year. These amounted, of course, to reductions in our liabilities. But falls of this kind would have led to big losses in the reserves had we not undertaken fresh borrowing.
§ In 1956, we drew £200 million in dollars from the International Monetary Fund. In 1957, we drew £89 million from the Export-Import Bank. We took back the 1956 interest on the North American loans, when it was agreed that this payment should be deferred, and further arranged the postponement of the service, both principal and interest, due at the end of the year on the same debts. Because of these operations the reserves actually rose a little in 1956 and by rather more in 1957: what we did was to reduce our short-term liabilities, at the expense of incurring medium-term and long-term debt.
§ The sterling withdrawals of which I have spoken were of two kinds. Those by non-sterling countries largely, though not wholly, reflected lack of confidence in sterling. They were substantial in the last part of 1956 and in the third quarter of 1957. The other kind of withdrawal was made by sterling area countries. This was due not to speculation, but to the worsening of their general balance of payments on commercial account. The rundown of sterling area holdings was concentrated in the last half of 1957 and amounted to no less than £226 million.
§ In the decline of confidence in sterling which reached its climax in the events of 41 last autumn, there were a number of factors, both internal and external, which led to a sudden outflow of our gold and dollar reserves. One of the most important was the continued rise in money incomes in the United Kingdom which produced serious doubt—a doubt which was felt within our own shores as well as overseas—about the stability and strength of our currency. Faced with this crisis the Government took drastic action to restore confidence—in priority to every other economic issue. The decisive response which we made was effective and received, too, I believe, the general support of the country as a whole. Since then, as the figures have shown, confidence in the £ has been restored.
§ In the third quarter of last year we lost £189 million from the reserves. In the six months since then we have increased the reserves by £328 million; £152 million of this came from borrowing from the Export-Import Bank and from postponing debt payments; the remainder, £176 million, reflects a strong commercial position and a genuine return of confidence in sterling. Broadly, therefore, even apart from the special measures taken to reinforce the reserves, we have regained what we lost in the third quarter of last year.
§ Today the reserves stand higher than at this time last year, excluding altogether the fresh borrowing and the postponement of the debt service to which I have referred. Indeed, at the end of last month the reserves were standing only fractionally less than £1,000 million. In addition—this is important and interesting—we reduced our sterling liabilities to overseas countries in the second half of last year by £227 million, and in this same period we increased our private overseas investments by over £100 million. So we have some solid progress to record.