§ Mr. Callaghan
In deciding what to do, it is necessary to recognise that budgetary action has a cumulative effect on demand, beginning gradually and then multiplying. Taking the early months of next year as my period of reference, I have concluded that we must act so as to reduce home demand in that period by £250 million at an annual rate. Towards this objective I have the cancellation of the TSR2, which will reduce expenditure by £35 million in 1965–66. My task is also lightened by the increase in postal charges of £32 million in 1965–66 announced by my right hon. Friend the Postmaster-General. This leaves me with the need for a substantial increase in taxation.
My proposals involve, in total, increases amounting to £164 million in 1965–66 and £217 million in 1966–67. Taking into account the nature and incidence of these increases, my estimate is that, working with the other measures I have mentioned, they will bring about the desired reduction in home demand and so make room for a progressive improvement in the balance of payments. These measures can of course be modified at any time, one way or the other, by adjustments of fiscal and monetary policy.
The Committee is only too well aware that we have a Bank Rate of 7 per cent., and that following the letter from the Governor of the Bank of England to the London Clearing and Scottish Banks last December a tight and effective control over bank lending is at present in operation. I should, of course, take further measures to reinforce this control if it were to prove necessary. But, taking the position as I see it today, I expect to see some easing of home demand as the year progresses, so that a big drive for export orders from now 288 on could have a very marked effect by next winter. Exports should improve during 1965 and with a real effort from industrial managements and salesmen we should make a big stride forward in our export trade in 1966.
The Committee will recognise the difficult choice I have had to make. This is a field where there are many uncertainties—I know only too well about using last year's Bradshaw—and where there are risks on either side. On one side, I have to remember that, despite the recent improvement, we are still in deficit on our overseas current and capital payments and we also have substantial loans still to repay. We must, therefore, get a sustained improvement in the balance of payments. We must make resources available and we must avoid excessive pressure on costs. In our own interests—and those of other countries—we cannot run risks.
On the other side, the Committee will recognise that action to reduce purchasing power now increases the risks that at some future time demand will fall too low. Yet we must not plunge industry back into the atmosphere of restriction and gloom that hung over it for a long time because of the measures taken in 1961. Nor must we destroy the newfound feelings of confidence and buoyancy in less prosperous areas such as Scotland, the North-East and Wales. Therefore, I emphasise when taking this budgetary action that we adhere to our policies of steady economic growth. The task is not to secure the under-employment of our resources, but their redevelopment in more rewarding fields of activity.