§ I now turn from the Exchequer to describe how the economy has fared over the past year.
§ The starting point of the economic analysis in my Budget speech last year was the existence of unused resources of capital equipment and manpower. I then foresaw a growth in demand, but not a sufficiently large one to make full use of these resources. The Committee will remember that, starting in the summer of 1958, the Government had deliberately put in hand various measures designed to stimulate the economy. Some involved the removal of restrictions and others the expansion of public expenditure. In the Budget I carried these measures of stimulation further. In this way, I hoped to encourage a further expansion of economic activity and a fall in unemployment.
§ These hopes have been realised. The number of unemployed fell from a peak of 621,000 in January, 1959, to 413,000 last month. Over the year, the numbers in employment rose by over 300,000, and the index of industrial production rose by 10 per cent., accompanied by a large 36 increase in productivity. These are good figures.
§ An important factor in the expansion was rising exports, which increased by 14 per cent. in volume between the three months ending February, 1959, and the same period a year later. This increase was better than I expected. The Government have continued to direct their policies towards the expansion of international trade and hence towards increasing export opportunities. But it is clear that the major cause of the increase in exports was the increased prosperity of all our main customers overseas.
§ At home, consumer expenditure makes up the largest part of demand. This was already rising somewhat—but not fast-before last year's Budget, mainly as a consequence of the ending of credit restriction, including controls on hire purchase, in the second half of 1958. Then the Budget itself left a good deal more money in taxpayers' pockets, and also reduced the prices of many consumer goods through the cuts in indirect taxes. Economic expansion also fostered the growth of consumer purchasing power, as employment and earnings increased, this being a year—last year, that is to say—in which earnings rose markedly even though wage-rates rose relatively little. Further, and most significantly, it was a year in which a rise in money income brought an equal rise in real income. The gains which people made were real ones. So there was a general growth in prosperity—which enabled consumers both to buy more and, at the same time, to save more than they had done in any previous post-war year.
§ Personal savings are estimated to have risen from £1,260 million in 1958 to about £1,450 million in 1959. This is a record figure. At the same time, the hire-purchase debt of consumers rose by £250 million in 1959. Bearing in mind that the increase in hire-purchase debt is an offset to saving—a form of negative saving, or "dissaving," as the economists call it—the achievement of so large an increase in net savings was a remarkable one. It was a practical demonstration of confidence in the policies of the Government, and it was a most important factor in the attainment of expansion without inflation.
§ Current expenditure on goods and services by public authorities rose by about 37 2½ per cent. The growth of capital expenditure in the public sector was a good deal faster, the increase being about 6½ per cent.
§ In the private sector, expenditure on fixed investment by manufacturing industry was less last year than it had been in the previous year, but fixed investment by other sections of private industry continued the upward trend which has gone on steadily for some years now. There was also a sharp rise in the number of new houses built on private account. In total, fixed investment, public and private, rose by about 4½ per cent. between 1958 and 1959. Incidentally, it was interesting and encouraging that the level of total fixed investment was at least maintained throughout the slackening of activity in 1957–58.
§ One of my forecasts last year was that investment in stocks would rise, and after allowing for normal seasonal factors the figures show a strong upward trend over the year,. As I said last year, our information about stocks is not always easy to interpret, but in the ordinary way one would expect stocks to be run down in the early stages of a recovery and to be rebuilt in the later stages. This does seem broadly to have been happening last year. Thus, a further source of rising demand was added to the already increasing factors, namely, exports, consumption and fixed investment.
§ The expansion of bank landing which began in the last part of 1958 has continued into the present year. In the banking year ended on 16th March last the advances of the London clearing banks rose by £642 million and their net deposits by £246 million.
§ For the reasons I have been describing the total demand on our resources rose during the course of 1959. The increased call on home production was not quite so big, because there was a fairly substantial rise in imports, most striking in the field of manufactured goods. Nevertheless, the index of industrial production rose by 10 per cent. between the end of 1958 and the end of 1959, and there were increases of activity on a substantial, though smaller, scale in most other sectors of the economy.
§ This large rise in production was achieved despite the fact that the numbers in employment rose less than 1½ per cent. It was, however, sufficient to 38 bring the figures of unemployment down sharply. The main source of increased production has been a most welcome rise in output per head. In the long run—we cannot too often remember this—this is the only way in which, as a nation, we can earn an increase in our standard of living. Over the country as a whole both our working population and our capital equipment are now pretty fully employed—though as we all know, there is, unfortunately, far from an even spread of activity over all areas and all industries.
§ In some parts of the country, there is still a problem of persistent local unemployment. The Committee is familiar with the various measures which the Government are taking in particular through the Local Employment Act to deal with this important problem, but there are other areas, containing at least 60 per cent. of the total labour force, where there is now a shortage of manpower, and there are some industries which cannot meet all the demands made upon them. Notwithstanding the difficulties of particular areas, the picture that emerges is certainly not that of a general weakness of demand.
§ My hopes of last year that expansion could be achieved without sacrificing stability of prices have so far been fulfilled. We have had good fortune with food prices. More important has been the movement of industrial costs. Changes in wage rates last year were comparatively small. Changes in average earnings were bigger, but increased wage payments were more than matched last year by increased production. Indeed, these increases in earnings were much nearer than in any other recent year to the rate at which increased productivity could enable us to continue expansion in the long term without inflation, and this was the biggest single contributory factor in the price stability of the past year.
§ Prices have now been stable for nearly two years—a year and ten months, I think—a much longer period than we have enjoyed for very many years. A stable cost of living has been of tremendous benefit to us all, and, most of all, to those who live on small fixed incomes. It has been an important factor too in the success of our exports. Its continuance must be one of the main objectives of our policy.
39§ I come now to the balance of payments, and here I must frankly say that the outcome of the last twelve months has been disappointing. I said in my Budget statement last year that I was not expecting so exceptionally favourable a year as 1958, when everything worked in our favour in this branch of the field. But I had hoped that the surplus on current account would be big enough to cover the normal flow of funds for investment overseas, including the increased aid which we planned to give to the underdeveloped countries. The first half of the year was not unfavourable, but the situation changed over the second half, with a marked deterioration shortly before the end of the year. This was largely due to an increase in imports—a natural consequence, of course, of the expansion in domestic activity—and to a fall in the surplus on invisibles, mostly because of a reduction of the net earnings from oil.
§ In the event, the current surplus fell from £349 million in 1958 to £145 million in 1959. A decline of almost £200 million on current account might seem marginal in relation to the total volume of transactions involved—of the order of nearly £5,000 million on either side of the account; but it is far from marginal in relation to the size of the sums which we must find for overseas investment and aid, and of our reserves.
§ On capital account, we maintained a high level of investment overseas. Particularly important were the loans to India and other Commonwealth countries, following on the decisions taken at the Montreal Conference in September, 1958, to increase economic aid to the less developed countries in the Commonwealth. There were also certain special capital transactions. In particular, we subscribed £232 million—an additional subscription—to the International Monetary Fund, and repaid the balance of the loan from the Export-Import Bank of £89 million. This increased subscription to the International Monetary Fund very considerably strengthened our second line of reserves, and the repayment of the Export-Import Bank loan saved us interest charges and extinguished a liability.
40§ Leaving aside the special transactions, the reduced surplus in the year on current account was insufficient to cover the capital outflow. The outcome was that, apart from these special transactions, the monetary position worsened by about £100 million—a most unwelcome result.
§ Let me sum up what I have been saying. Our policy in 1959 was to stimulate the revival of business activity, investment and employment, while maintaining price stability, and that policy succeeded; but we must never allow ourselves to forget the close connection which exists between the level of home demand and the state of our external balance of payments. Our standard of living depends ultimately on our ability to pay our way in a very competitive world. And if we overstrain our resources of manpower and materials, the result must be both to handicap our exports and to swell our import bill beyond what we can afford. The deterioration in the balance of payments towards the end of the year was a sign—the first sign— of incipient overstrain, and it was to moderate this tendency that the Bank Rate was raised on 21st January from 4 per cent. to 5 per cent.
§ I feel that I must apologise to the Committee for the rather statistical nature of these reviews. I hope that hon. Gentlemen who find them fatiguing will perhaps feel like Mark Twain—I think it was—felt about classical music, when he said that "it was a great comfort anyway to know that it was very much better than it sounded."