§ I now turn to the state of the economy during the past year.
795§ Twelve months ago, my predecessor took certain steps designed to avert the danger that the expansionary forces in the economy could lead to overloading. The Budget itself made a small net increase in taxation, and measures were taken outside the Budget to restrain the growth of bank lending and of consumer credit.
§ These measures were intended primarily to restrain personal consumption, and they were successful in that aim. Purchases of cars and household durables fell away and this kept the total of consumer expenditure roughly constant during the course of 1960, although at a level 3½ per cent. above that of 1959. The limiting of spending on credit checked personal consumption without affecting the general level of personal incomes. Indeed, there was an unusually rapid rise in real personal income—about 5 per cent. over the course of the year. But there was also a rise in personal saving. In the last quarter of the year the proportion of personal income saved was running at about 9 per cent.
It was not part of Lord Amory's purpose to restrict the growth of investment. Accordingly, the restraining measures did not include any reduction of the initial or the investment allowances, and fixed investment continued to rise rapidly. In manufacturing industry, the rate of capital expenditure in the second half of 1960 was over 20 per cent. higher than twelve months before, and in distribution and the other service industries there was a rise of 8 per cent. Public investment, having risen fast in 1959, flattened out in 1960. As a whole fixed investment was running 8 per cent. higher in the second half of the year than the year before, and for the whole year 18½ per cent. of the gross national product went to fixed investment—that is, over £4,000 million. That is not a figure we should be complacent about, but, nevertheless, an encouraging increase.
§ As for the remaining elements of domestic demand, current spending of public authorities continued to rise rapidly and the rate of stock-building continued at a high level in the second half of the year. The net result of all these movements in the different elements of domestic demand was, on the one hand, a rather slow increase in the total, 796 but, on the other hand, a distinct change in composition with the share of investment rising and the share of consumption falling.
§ But there were other respects in which the issue was less favourable. Mainly owing to continuing high pressure on resources, the stability of prices which had been achieved in 1958 and 1959 came under strain. At the end of 1960, the index of retail prices was two points higher than it had been a year before. The underlying trend of costs has begun to rise appreciably. This, in turn, reflects the greater scale and faster tempo of the increases in wages and salaries. In contrast with the experience of the two-and-a-half years before mid-1960, the most recent wage round has provided increases going well beyond the rate of productivity increase, and the interval since the previous round has also been shortened. Such developments are bound to put pressure on costs and prices. We saw that happening in 1960.
§ Secondly, the index of industrial production flattened out from April of last year onwards after having risen about 10 per cent. in the previous twelve months. Thirdly, there was a large increase in imports associated with a higher rate of stock-building. To meet this import bill and to meet our other commitments we needed a substantial increase in exports but we did not get it. Partly responsible for this was the rather special situation in the United States where our sales, particularly of cars, fell off considerably. It is also true that the expansion of world trade in general considerably slackened last year. But even allowing for these factors our export performance was a disappointing one over the year as a whole.
§ The most serious consequence of these trends was their effect on our balance of payments. Hon. Members will have read the White Papers and will be aware that the estimate of the deficit on current account of over £340 million in 1960, is not statistically comparable with previous figures. For the reasons given in the Balance of Payments White Paper we have had to move to a new basis for computing the figures. The effect of this has been to increase the provisional estimate of the deficit on current account in 1960, with corresponding offsets in other parts of the account, including a reduction in the deficit on long-term capital.
797§ But, on any basis of calculation, the balance of payments during 1960 was very unsatisfactory. The situation can, perhaps, best be judged by looking at the external monetary position—that is to say, the balance between our recorded short-term assets and liabilities. This deteriorated by £168 million in 1960; a figure comparable with a change for the worse of £119 million in 1959, if we ignore certain special transactions of an abnormal character in that year such as our further subscription to the International Monetary Fund.
§ I have already mentioned the rapid rise in imports and the disappointing course of exports. Net invisible earnings also fell. On the capital account United Kingdom aid to developing countries continued to grow and, in 1960, was at a rate nearly double that of three years previously. And private investment overseas was maintained at the high level of previous years.
§ Summing up, I would say on the good side that generally 1960 was a year of very full activity: a year of rapidly rising real personal income, of high saving and of rising investment. But the other side of the medal was the dangerously high pressure of demand on productive resources, the signs of a return of increasing costs and prices, the failure of our exports to increase sufficiently, and the consequent serious weakness in our balance of payments. It cannot be denied it was a year of widespread prosperity. Equally, it cannot be disputed that that prosperity did not rest on a sufficiently secure foundation.