§ Against this background of public expenditure I have to consider the pressure of demand in the coming 12 months. The rate of growth of real output in recent months of around 6 per cent. has been possible while we have been taking up slack in the economy, but, clearly, it cannot continue indefinitely. We must aim at transition to a growth rate which can be sustained of something like 4 per cent.
§ As I said earlier, in the coming months demand seems likely to be rising at substantially more than 4 per cent. and, therefore, something must be done to reduce its growth. Looking at the problem in terms of the Budget accounts, the figures I have given the Committee show that at current rates of taxation the growing level of public expenditure is likely to produce a deficit this year of about £36 million above the line and £894 million overall.
§ If we are to effect the transition to 4 per cent. and to avoid the danger of what the economists call "overheating" the economy, then I must seek to finance a larger proportion of this public expenditure out of taxation; in other words, I must do something to reduce this prospective deficit.
§ My decision as to the size of the change I must make is clearly a matter of judgment, not of exact calculation. Most of the figures on which I have to work in order to analyse our economic situation are, from their nature, estimates and not precise computations. The level of stock-building, for example, is extremely difficult to predict. At the moment it is high, and likely to continue high; but it is impossible to put an exact figure on the trend of stock-building later this year.
§ The level of savings is just as fundamental. If anything were to disturb 268 the willingness to save, either in the longer or the shorter term, the balance of the economy would suffer. A fall by 1 per cent. in the proportion of personal income saved would mean an increase in demand in 1964–65 of over £200 million. I shall shortly have some proposals to make in respect of savings.
§ I must also remember that further increases in Government expenditure would upset my calculation, and the trend of incomes, whose importance for our external balance I have just stressed, is difficult to predict with any certainty. I must emphasise the importance of these factors for our policy decisions. If incomes rise so fast as to imperil our external balance; if Government expenditure is not properly and carefully controlled; or if anything should happen to undermine the trend of savings, then in each case our situation would be made very much more difficult and more drastic remedies would be required. The level of taxation necessary to maintain stability depends very much on maintaining a rational attitude to public expenditure, to incomes policy and to the encouragement of savings.
§ To sum up, the considerations I have to weigh in reaching my conclusion are these. On the one hand, there is the growing level of public expenditure which, as I have explained to the Committee, means that, even with the natural buoyancy of the revenue, we must look forward to an above the line deficit next year of £36 million. There is also the fact that our current rate of expansion is one that cannot continue indefinitely without leading to the familiar difficulties internally and externally. On the other hand, it is important not to overlook the natural corrective factors that may come into play or the danger of checking expansion rather than moderating it. This, as I have said, must be a matter of judgment. It cannot be a matter of exact calculation.
§ This year, as last, I have studied the advice offered to me from many distinguished independent sources. Last year, I thought that they were advising me to reduce taxation more than was needed. This year, I am inclined to think they are doing the opposite. Just as, last year, it was not necessary to provide a stimulus to the economy of the order of £400 million, as some people suggested, so, this year, I do not believe 269 it to be necessary to increase taxation by the figures that have, in many quarters, been put forward.
§ The best judgment I can make is that if taxation is increased in this Budget by the equivalent of about £100 million, thus converting the above-the-line deficit of about £36 million into an above the line surplus of about £70 million, I should be doing enough to steady the economy without going so far as to give a definite check to expansion. The effect of tax changes on this scale should be to moderate the present rate of expansion, and to make it possible for real growth to continue at the rate we all wish to see.