§ (a) Balance of Payments 1966
§ The dominant feature of 1966 was, of course, the crisis in our overseas payments that developed in the summer and the Government's measures of 20th July. These measures had a substantial effect at home and abroad. Abroad, they have been without question beneficial and advantageous. In the growing interrelationships that exist between modern States the simple knowledge that Britain is paying her way again earns us greater attention for our views and policies. Even more important, it gives us more freedom of manœuvre, more choices of action.
§ At home, the measures have been a mixed blessing. It has been a good thing that firms have become more cost conscious, that home orders have not got in the way of exports, there is less of the take it or leave it attitude, orders are being met more promptly and manufacturing prices have been almost completely stabilised. That is the good side of the medal. On the other hand, unemployment in some of the regions has been too high, and we have suffered a loss of output. Broadly speaking, the measures are doing what the Government expected of them, namely, restoring our fortunes abroad while giving us an uncomfortable time at home. But the overall verdict so far is clear. The freeze and squeeze have been worth it. 975 The question for the country and the Government is whether we can look forward to some improvement at home without losing the great advantages we are daily gaining overseas. I intend to answer this question during my speech.
§ As I have said, the slackening of domestic demand has helped the export drive. Despite the disruption caused by the seamen's strike, exports rose in value in 1966 by 6½ per cent. During the past two years they have risen by more than 14 per cent.—the largest increase of any two-year period over the past decade. Exports to the difficult market of the United States increased in 1965 and 1966 together by over 50 per cent. Because of the July measures, as well as of the temporary import charge, imports rose less than usual last year, by 3½ per cent.
§ As a result, the balance of trade again improved. The deficit on visible trade alone—I am not referring to the balance of payments as a whole—which was £543 million in 1964 and reduced by half to £269 million in 1965, was reduced again in 1966 to £138 million. This is an improvement of £405 million in our trading accounts in the first two years of the Government's life. Putting it in monthly figures the deficit shrank as follows: 1964—£45 million per month; 1965—£22½ million per month; 1966—£11½ million per month.
§ Net invisible earnings last year were abnormally low at £77 million. They were depressed by a number of factors. Outgoings increased because we resumed payments on the North American loans. The net outcome was that the deficit in our balance of payments on current account was reduced to £61 million. In 1964, the corresponding deficit was £393 million.
§ With the help of the steps I have taken to moderate private investment abroad, the net outflow of private capital was small, and the deficit on long-term capital as a whole was reduced to £128 million. In 1964 the corresponding deficit was £368 million. So this is an improvement of £240 million in two years.
§ The overall balance of payments deficit, on current and long-term capital account combined, was brought down from £348 million in 1965 to £189 million last year. If allowance is made for non-payment of the service on the North American 976 loans, the corresponding deficit in 1964 was £822 million. So that there has been a total improvement in two years in our balance of payments of £633 million.
§ (b) Balance of Payments—Recent Trends
§ The last quarter of the year showed an encouraging contrast with the first three: we had a surplus on visible trade of £112 million, seasonally adjusted. Anticipation of removal of the surcharge made a contribution to this, but exports also did well, and by the end of the year they were running 10 per cent. higher than a year before. In spite of resuming payments on the North American debt, there was a recorded overall surplus of £121 million.
§ It is too early to estimate the outturn of the balance of payments as a whole in the first quarter of this year. But, despite heavy arrivals of imports following the removal of the surcharge, the deficit on visible trade in the three months December to February has averaged no more than £7 million a month.
§ As was to be expected, confidence in sterling has revived with the improvement in the balance of payments. The rate has moved up against other currencies and we have now repaid in total our temporary borrowings from central banks in the United States, Europe and elsewhere. In addition, our reserves of gold, dollars and other currencies have increased by £57 million since the beginning of the year.
§ (c) Repaying the I.M.F.
§ So, as a result of the July measures, we have seen a great improvement in the balance of payments, in international confidence and in our debt position. What of the future? I utter a word of caution.
§ We are still encumbered with two legacies from the past. Our first drawing from the International Monetary Fund in the winter of 1964 was for £357 million. We have made inroads into this debt by permitting sterling drawings by other countries from the International Monetary Fund and the debt has now been reduced by £65 million to £292 million. This will be repaid, together with the £28 million borrowed from the Swiss authorities, not later than 2nd December this year. Indeed, I expect to make some payments earlier than this, as there will be ample resources for the purpose, in the r00eserves, 977 in the Treasury portfolio, and from the surplus in our balance of payments that I expect us to earn during the coming year.
Beyond that we have the further £500 million I.M.F. drawing, negotiated in the spring of 1965, which we are under an obligation to repay by 1970. To do this we must continue to earn a surplus on our balance of payments.
§ The ability to earn such a surplus depends not only on ourselves, but also on the course of world trade. This, in turn, depends on the international monetary arrangements available to finance the growth of trade. There are two aspects of this: the short-term co-operation between Governments and international monetary authorities which is necessary to lubricate the workings of the present international monetary system; and, secondly, the discussions which are taking place about the long-term reform of the system itself.
§ (d) Short-Term Co-operation
§ The procedures for short-term co-operation have developed in a remarkable way. Very close relations have been built up in recent years between those responsible for managing the economies of the major industrial countries—both in Treasuries and in central banks. I speak from a special vantage point as Chairman for this year only of the Group of Ten of these nations and I should like to pay tribute to a degree of co-operation which has done a great deal, in my view, not only to offset the harmful effects of short-term capital fluctuations, but to create conditions favourable to the growth of the world economy. There is an increasing understanding of the responsibility of creditors, as well as debtors, to help in correcting imbalances in international trade and in financing them; and all countries increasingly see the need to maintain stable growth and a high level of employment.
§ There are two major internationally agreed arrangements in operation to offset disturbing flows of short-term capital. The first is the network of currency swap facilities, centred on the Federal Reserve Bank of New York and involving a large number of countries. This was considerably enlarged last September. Then there are the arrangements agreed in Basle, last June, and renewed last month by which a number of central banks agreed to off- 978 set movements in the sterling balances. Both sets of arrangements promote currency stability and thus help to sustain a high level of world trade.
§ This short-term economic co-operation, which has been growing, has also yielded useful results in bringing down interest rates. I have often commented that the increase in our own Bank Rate to 7 per cent. last July, while it had its place in the range of our corrective measures, was also a reflection of the general rise in international interest rates.
§ It had for some time seemed to me that this was a field where a measure of informal consultation and agreement could avoid needless competition. As the Committee will remember, the Economic or Finance Ministers from France, Germany, Italy and the United States met to discuss this problem with us at Chequers earlier this year. Our discussions showed a wide measure of agreement. The meeting took place at a fortunate time because the first signs were already appearing that rates were ready to move down. Among other things we did that weekend was to give them a downwards shove. The movement continued throughout the first quarter of 1967, and our own Bank Rate has been reduced twice, in January and March.
§ For obvious reasons this is a difficult field in which to anticipate the future. But our actions since the beginning of the year show that we are ready to take advantage of opportunities to bring our own rates down where we can do so without detriment to the balance of payments or to the objectives of domestic economic policy. I hope to see a continuing gradual decline in other countries, which should have a corresponding effect here.
§ (e) Long-Term Co-operation
§ Long-term co-operation with the aim of reforming the international monetary system itself has now been discussed actively in the Group of Ten and the I.M.F. for a considerable time. The aim is to ensure that an expansion of world trade, economic growth and adjustments between surplus and deficit countries are not hampered by lack of adequate reserves. The method is to produce a contingency plan for the creation of a new form of international reserves which 979 could quickly be put into operation if at any time an international shortage of liquidity becomes a serious problem.
§ Progress is inevitably slow in dealing with a subject to this kind, which involves difficult technical as well as political issues. One such issue concerns the future rôle of the reserve currencies, that is, the dollar and sterling. Objection is taken that the possession of a reserve currency enables the countries concerned, namely, the U.S.A. or Britain, to ignore balance of payments deficits for an unduly long time and to delay the adjustment of their policies.
§ I think that in this country we would agree that, if true, this is a dubious blessing. If the only case for a reserve currency were that it enabled an outgoing Government to shuffle their liabilities on to the shoulders of their successors, then, with memories of 1964 still green, there is not a Member on this side of the Committee who would not say, "Get rid of it". But, of course, there is much more to it than that. The world cannot get along without national currencies that are internationally acceptable and exchangeable. They will continue to be needed whatever new reserve asset is introduced to supplement existing assets. Britain does not wish to extend the use of sterling as a reserve currency. But, on the other hand, we do not wish to see the growth of world trade hampered by a lack of reserves.
§ Hence my constant pre-occupation with plans for reforming the world monetary system. I am encouraged by the technical progress that is being made; the possible solutions are all the time being clarified even although agreement is still some way off. In the past, by contrast, reforms, if they were made at all, were devised only after acute economic crisis had been suffered. It is a striking advance for the nations to discuss contingency plans at a time when world trade is still expanding. Our discussions have progressed so far that, if there is a general desire to make progress, the main outline of a specific plan could be laid before our next meeting of the I.M.F. Governors at Rio de Janeiro in September. I hope that it will.
§ (f) World Trade
§ With that as the background to world trade, I should say what the Govern- 980 ment's view is about its development. In the light of our experience of the way that co-operation has gone, I think that we can take a confident view about world trade. During the past 10 years the average rate of expansion in manufactures has been about 9 per cent. a year; in no year since 1958 has the rate of growth dipped below about 5 per cent. I hope that the coming negotiations in the Kennedy Round will reach a successful conclusion, and give a further impetus to expansion.
§ Added to this, free trade in industrial products has now been introduced in E.F.T.A., three years earlier than originally planned. I think it is reasonable to assume, therefore, that world trade will continue to expand in the years ahead without any major setback, and thus offer us good hope of increasing our exports.
§ (g) Exports and Imports
§ Apart from the movement of world trade, the main factor in our balance of payments performance is the way we manage our own affairs. A better trend in our costs and prices improves our competitive position. A lower pressure of demand improves the supply position, ensuring that deliveries are quicker and the urge to export greater. I recognise that too low a pressure of demand at home reduces a company's profit margins and if continued for long may adversely affect exports. I shall keep this in mind. Nevertheless, our recent performance has been encouraging. As regards imports, a lower average pressure of demand than we have permitted in the past should also mean that we do not again suffer the kind of upsurge that has so often damaged the balance of payments, although such a policy has certain implications for the regions, to which I shall come later.
§ (h) Invisibles
§ On the other items in our balance of payments, I take, first, invisibles, such as shipping, civil aviation earnings, interest, profits and dividends from abroad. Here, I expect to see a significant improvement in the years ahead, particularly if we can pull down Government spending overseas, as we have set out to do. I come to that immediately.981
§ (i) Overseas Government Expenditure
§ First of all, Germany. It was not possible, mainly owing to the change of Government in the Federal Republic, to bring the tripartite talks to finality by the end of December, as I had hoped. Nevertheless, these talks have recently made very satisfactory progress and have now reached their final stage. I am not in a position to give complete details to the Committee today, as the final outcome embraces parallel arrangements being made by the American and German Governments. But I am now confident that it will be possible, by a combination of administrative economies in our forces' expenditure, of United States and German purchases and other payments in the United Kingdom, and a redeployment of forces, to cover by far the greater part of our costs for the coming year.
§ We hope to obtain the agreement of our allies in W.E.U. and N.A.T.O. to the necessary redeployment of forces in accordance with the prescribed procedures. The total cost in Deutschmarks of our forces in Germany in 1967–68 is expected to be £82 million. I estimate that it will be possible to cover about £72 million of this total.
§ I now come to the total estimated saving of Government expenditure abroad, as a result of all our measures so far. I can take credit for an additional £20 million of savings in respect of Germany by comparison with last year, and this, added to our other overseas economies in defence and aid, means that the total saving will be at the rate of just under £100 million a year at the end of 1967–68. So far, so good—practically on target. But, of course, we have gained the £20 million from Germany for one year only. We shall need to maintain this in later years.
§ This brings me to the capital account of the balance of payments. The last two years have seen a large reduction in the net outflow of private investment under the influence of the Government's measures.
§ (j) Voluntary programme
§ Among these measures is the voluntary programme—which I announced last May—aimed at moderating the outflow of capital from the United Kingdom to the four developed countries of the sterling area. I am grateful for the co-operation I have received from industry, and 982 from institutional investors, in getting the programme under way; and I am grateful, too, for the understanding attitude of the Governments concerned. The programme is working satisfactorily. I propose to continue it for a further year.
§ As regards the remaining years of the decade, when I see more clearly the rundown of overseas defence expenditure as well as the surpluses required for the repayment of the I.M.F. by 1970, it may be possible to ease some of the existing exchange control restraints and to relax the voluntary programme.
§ (k) Reddaway Report
§ At this point, I should say something about the recent report by Mr. Reddaway and his team on the effects on the balance of payments of direct investment overseas by British companies. The report covers a lot of ground. But it is particularly relevant to the claim, which is made so often, that the benefits from overseas investment are not to be measured in terms of yield alone and that there are important indirect advantages in the shape of additional exports. My conclusion is that the Report does not bear out this claim.
§ What it demonstrates is that there is a wide diversity of experience and type of benefit from different kinds of direct investment, and it recommends a policy of selectivity. That is already the basis of our exchange control policies in this field, and of the voluntary programme. I have had the advantage of preliminary discussions with the leaders of the C.B.I. and after hearing their views will endeavour to work out a constructive solution.
§ (l) Security Sterling
§ There is one new measure in the overseas field which I wish to announce. It concerns security sterling. I have been considering the impact on our reserves of certain transactions through the free currency markets which operate within the sterling area in the Persian Gulf and Hong Kong. I have given instructions for a fresh drive against illegal transactions by United Kingdom residents through these channels and for tighter administration, in consultation with the authorities in Hong Kong, of the control which is exercised over the sterling accounts of residents of Hong Kong.983
§ At the same time, I have decided to unify the security sterling and official exchange markets with effect from tomorrow. Large transactions take place in security sterling, but the difference in rates has for many years been small. In future, both purchases and sales by nonresidents of sterling securities will be made over the official exchange. As a result, some of the foreign currency which has hitherto been exchanged for security sterling in the free markets will now be used for purchases in the official market, and hence come to the reserves. The net effect of the change on the reserves should be beneficial and it is in any case helpful to get rid of arrangements which have outlived their usefulness.
§ (m) Summing up
§ I have now given the Committee an outline of the prospects for world trade, imports and exports, invisibles—including Government expenditure—and private investment abroad. This is based upon a very careful study of the probabilities on all these fronts up to 1970. These studies will be discussed and refined with the help of both sides of industry through the N.E.D.C. over the coming months. Nevertheless, it is already possible to draw some conclusions, even though figures cannot be absolutely certain when we are looking as far ahead as 1970. The Committee and the country should know what these conclusions are. They do not support the widespread, gloomy and inaccurate view that we can maintain a sound balance of payments only at the intolerable cost of giving up growth in the economy.
§ Let me put it this way. Provided that we keep our costs competitive, we can earn a surplus on the balance of payments sufficient to enable us to meet our obligations to the I.M.F. and, at the same time, achieve a sustained growth of our national output. This growth would be in line with the rate of expansion of our productive capacity. The Committee will want to know what that is.