ECONOMIC SITUATION (Hansard, 14 July 1966)

§ The Prime Minister (Mr. Harold Wilson)
With permission, Mr. Speaker, I wish to make a statement.
The House will be aware that sterling has recently been under some pressure as a result of several abnormal factors predominant in which has been the seamen's strike. It was known that the seamen's strike would be costly to the country for as long as it lasted and the publication of the reserve figures for June, during the whole of which period the strike was in force, has had an unsettling effect abroad and wrong deductions have been drawn about Britain's long-term economic position from the price we had to pay in the short term.
The House will, however, be aware that this short-run price was something which we deliberately accepted from the outset, not least because of our determination to make the prices and incomes policy effective. The effects on sterling and on our long-run economic position had we taken any other course would undoubtedly have been serious and lasting.
At the same time, other short-run factors including a rise in import prices, particularly copper, have aggravated the temporary speculative strain on sterling.
I have repeatedly made it clear that the Government will not hesitate to take whatever measures we regard as necessary to ensure the balance of the economy, to strengthen our balance of payments and to maintain the strength of sterling. 1734 The House will be aware that Bank Rate has today been raised to 7 per cent. There were, of course, special and compelling reasons for this quite apart from the factors I have mentioned, reasons deriving from the fact that, owing to the growing shortage of liquidity, interest rates and central bank rates are rising all over the world particularly in Europe.
In addition, the Bank of England has this morning announced a further call from the clearing banks for special deposits, which will reduce bank liquidity by a further figure of nearly £100 million. This is, of course, in addition to the announcement by my right hon. Friend the Chancellor of the Exchequer two days ago about the limit of credit.
These short-run factors I have mentioned have, of course, been given their place in the Government's review of the state of the economy, particularly the prospects for the balance of payments. We have reviewed the internal situation including the deployment of resources and the state of pressure in the economy, the recent increase in imports, the movement of incomes and prices, the trend of demand, and also the rate of growth of overseas expenditure.
As the House knows, the effect of the tax measures, including the Finance Bill, together with the tight grip still maintained and now intensified on monetary policy, will have substantial disinflation.. ary effects later in the year. We believe, however, that further measures will be necessary both as regards the internal situation and overseas Government expenditure, and that these measures should be related to the broad economic strategy we have been following particularly with regard to the balance of payments.
This review is now proceeding and I intend to make a further statement in the House in the near future about the measures we shall propose which will have the effect of providing the restraint that is necessary in internal demand, public and private, particularly the redeployment of resources according to national priorities, and also the steps needed to make a substantial reduction in overseas Government expenditure which is running at a rate excessive in relation to our resources and is a major impediment to the restoration of balance in our overseas payments.
1735 I cannot anticipate the statement I intend to make, but it will be made in good time before the House adjourns for the Summer Recess. I can assure the House that when it is made it will be regarded as real further proof of our resolve and determination to balance our payments and to strengthen the pound at home and abroad. The statement I shall make will provide measures necessary for dealing with the longer-term problems we face since it is important not to allow the short-run factors such as the seamen's strike and its effect on monetary movement and on the trade balance to distort our position in its true perspective.
In the first five months of this year, which included the early days of the seamen's strike, British exports were running at a rate 9 per cent. higher than in the same months of last year and all the indications were and are that our exports would continue to rise at a substantial rate. It is on our export drive, and our determination to reinforce our export drive, that the achievement of our long-run economic and social aims and the maintenance of full employment and, equally, the strength of sterling and Britain, depend.

§ Mr. Heath
Is the Prime Minister aware that this announcement of further serious economic measures is in direct conflict with the guidance which was clearly given to the Press by the Government and the Treasury on Monday—that no further measures were required? Is he aware that it is wrong and foolish and will produce no response in the people of the country to blame the present position on the seamen's strike, or on the price of copper, or other short-term influences of that kind, because the present situation is due fundamentally to a complete lack of confidence at home and abroad in the Government's economic policies?
Is the Prime Minister aware that when he states that further measures are required that is obviously proved today, because the 7 per cent. Bank Rate had already been discounted, as is clearly to be seen from what has happened to sterling since the announcement of the Bank Rate change at midday, which makes the position more serious?
1736 Is the Prime Minister aware that the fact that he cannot announce these further measures today is further condemnation of the unpreparedness and incompetence of the Government? Is the Prime Minister aware that this situation will be remedied only when the Government tackle the fundamental problems of the country, which they have so far failed to do and which the Prime Minister gives no clear intention of tackling, and that the whole of the rest of the world recognises that? Is it not the plain fact that the Prime Minister fought the last election on a bogus prospectus and that now everybody knows it?

§ The Prime Minister
The right hon. Gentleman is quite wrong to say that it was not the seamen's strike and other short-run factors which caused these recent difficulties. As he will know, the economic situation was recovering rapidly up to the seamen's strike, sterling was strong and the reserves were improving immediately before the seamen's strike in May—[HON. MEMBERS:"Oh."] The reserves were improving in May before the seamen's strike. The position was getting stronger.
All of us knew that the seamen's strike —the right hon. Gentleman himself was very tough in saying that we must not go beyond the Pearson award—would involve a heavy cost. It was when the cost in terms of the gold and dollar reserves, gold and the convertible currency reserves, for the month of June, were published, that this trouble in sterling developed. This is very much related to and caused by the short-run effects of the seamen's strike.
Of course, it would be possible, in the face of this sterling position, to do as right hon. Gentlemen opposite did and come rushing to the House with panic measures irrelevant to the longterm needs which are being dealt with in this review. Of course, we could have put the brakes on and stopped the full employment policy. Of course we could, as they did, time after time, hold back for three years any further economic advance and attack the social services and the development areas.

§ Mr. Sheldon
While none of us can be very happy about the need to introduce further measures of the kind that my 1737 right hon. Friend has mentioned, would he say, first, whether the overseas expenditure that is to be reduced will be military or non-military, or both, and secondly, will he say what actions will be taken to make sure that the deflationary measures he takes do not have the effect on investment that so many have been forecasting?

§ The Prime Minister
I would ask my hon. Friend to await the statement which I hope to make very soon.
On the first point of my hon. Friend's question, I have just said that I think it right to take our time in getting measures related to a longer-term strategy rather than to bring in panic measures which, in the past, have always led to a grinding-down of investment.

§ Mr. Richard Wainwright
Will the Prime Minister say whether the measures he has in mind are calculated to take effect well before the intended effect of the Selective Employment Tax begins?

§ The Prime Minister
Yes. As I explained in my statement, that will take effect from the autumn onwards. We believe that it is necessary to make some impact even earlier than that, although many of the things we shall be proposing will take time to operate, particularly so far as exports are concerned.

§ Mr. Michael Foot
Will the Prime Minister assure the House that this review will involve fresh decisions about the defence burden that the country carries, both in Germany and east of Suez, a burden which is quite out of proportion to those borne by most other countries in Western Europe and one which is quite out of proportion to the other burdens that the nation has to carry?

§ The Prime Minister
I would ask my hon. Friend to await the statement. As he knows, and this was said in the Defence Review and emphasised repeatedly since, the commitments and roles that we have cannot go on imposing the very heavy burden on our resources which is the position at present. My right hon. Friend the Chancellor supplemented what had been said in the Defence Review on that question in his Budget speech in May.

§ Mr. Tapsell
Does not the Prime Minister realise that his refusal today 1738 to accept the fundamental nature of the problem facing our economy and his failure to spell out in detail what his Government intend to do to grapple with it will aggravate the problem?

§ The Prime Minister
The hon. Gentleman has his own opinions upon what is the fundamental problem. Perhaps he will tell us at some future date. We shall be very glad to hear from him.
It is right that I should at this stage inform the House that we intend to take further measures, which we consider to be necessary. It is also right that they should not come out, as so often happened in past years, over-hurriedly and without proper consideration of their real effects on the economy as a whole.

§ Mr. Tinn
In addition to the factors elucidated by the Prime Minister as underlying the weakness of the £, would he agree that the £ is particularly exposed by reason of its position as an international trading currency? In looking at a long-term solution will the Government be giving attention to this factor?

§ The Prime Minister
Of course, the fact that sterling is one of the great reserve currencies means that it is always exposed to winds which have nothing whatever to do with the internal situation, and which are quite apart from our trading position. This has happened time and time again under successive Governments. It is a fact that during the past few weeks the economic situation has been made very much tougher for everyone in Europe by the shortage of liquidity—which has now become very serious indeed and about which the whole House has expressed views in the past—by the shortage of Euro-dollars and by the rapid rise in interest rates in different parts of Europe. There cannot be any solution sought in any change in the position of sterling on the lines suggested by my hon. Friend.

§ Mr. Barber
Why will not the Prime Minister"come clean"at last and tell the House that the basic trouble is that he is stuck with an incompetent Chancellor of the Exchequer who, in turn, is saddled with a double-talking Prime Minister?

Several Hon. Members
rose—

§ Mr. Speaker
Order. I must protect the business of the House.
The Clerk will now proceed to read the Orders of the Day.