§ (a) The Outlook
§ Our policies for the present year must fit into the general strategy that I have indicated. We are about to enter a new phase of economic policy. As the year goes on the economy will pick up speed. It will be a year of quickening growth.
§ It has been argued recently that the Government should reveal more of their short-term economic forecasts than has been the practice in the past. This suggestion raises various problems, but I shall be more forthcoming than at any time since the middle 1950s. And, in return, I hope that the commentators will treat these and all the unofficial forecasts with an appropriate degree of irreverence. Forecasts are a necessary guide to policy, but they can only indicate the general character, and not the precise magnitude, of coming economic developments.
§ Despite the sharp check to output caused by the July measures, the gross domestic product in the second half of 1966 was similar to that in the first half. In other words, the check did not lead on to a recession, and in recent months activity has been stabilised. It is my judgment that activity is now likely to resume an upward movement. The problem for the Budget and for economic policy later in the year is to see that this movement is neither unnecessarily stunted nor unduly stimulated.
§ There will be two main expansionary forces at work—higher exports, and higher public investment. As I indicated earlier, the outlook for world trade is fair. It may be that, with a more moderate tempo of expansion in the United 993 States and in Germany, world trade in manufactures will not grow this year as fast as it did last year, but, even so, it should still expand at a rate not far short of the long-term trend. The expectation is that our volume of exports of goods and services will rise by 3 to 4 per cent. between the second half of last year and the second half of this year. The rise in value would, of course, be greater.
§ Public investment is likely to go up by about 8½ per cent. at constant prices. On the other hand, I expect public current expenditure on goods and services to go up by only about 2½ per cent. if purchases of U.S. military aircraft are excluded. In this context, I think it right to do this, since the aircraft are imports financed by American credit and so make no demand on domestic resources this year. Another reason for expecting demand to rise is that the restraining effect of the hire-purchase controls will gradually lessen.
§ As against these expansionary forces, we have not yet seen the end of the downturn in private fixed investment, although the picture is not uniform even here. The cuts in Bank Rate and improved credit facilities have helped towards the beginnings of a recovery in private housebuilding. I expect this to go on. The extent of the fall in investment by the rest of the private sector—manufacturing and distribution for the most part—is, fortunately, not likely to be as severe as the exaggerated forecasts which were put about last autumn, but it will be enough. It may be about a 10 per cent. drop, and experience suggests that investment plans can change very rapidly if the economic situation improves.
§ To move from these considerations to a view about the pressure of demand and about unemployment is a complex and uncertain calculation. There are many factors to be taken into account in reaching a conclusion, and there is no way of predicting these with any degree of precision. However, I have been asked to hazard a judgment, and I will do so, and it is that total output will rise by close to 3 per cent. between the end of 1966 and the end of 1967. That is, it will rise at a rate not far different from that of productive potential. To put the matter another way, I expect demand to rise almost at the rate we can sustain in the 994 medium term. It follows, as I said earlier, that the overall level of unemployment would not be very different if matters were left here, but this is an uncertain field of forecasting, and I shall be watching trends very carefully in the coming months. This also makes it all the more important to make our policies effective in reducing regional unemployment. That is where the problem lies, and that is why we are determined to push ahead with our plans for regional improvement.
§ On the external side—and here I compare the calendar years 1966 and 1967—we expect a rise in the value of exports of goods of 6 per cent. There are two special factors that will swell the growth of imports which should be discounted in arriving at the underlying trend in imports. One is the purchases of U.S. aircraft I have already referred to, and the removal of the import surcharge. Apart from these factors, the increase in imports is unlikely to be large if, as I expect, domestic output grows moderately and the pressure on resources is not high.
§ I also expect a recovery in our net invisible earnings after the dip in 1966. The present restrictions on travel expenditure provide a useful gain. The year runs from November to November, and it is too early to decide the arrangements for the year from next November. I also expect an improvement on capital account. This will embrace credits from the U.S. Export-Import Bank matching the bulk of the aircraft payments I have just alluded to. Taking everything together, the overall balance of payments should improve again substantially between 1966 and 1967. We should move from last year's deficit of £189 million to a surplus in 1967 as a whole, with an even bigger one in 1968.
§ (b) Budget Judgment
§ My conclusion from this assessment is that I should not take any substantial action to influence demand just now. Should it appear in the coming months that further measures are needed, they will be taken then. It follows that I do not wish to propose any major tax changes to the Committee, but a number of smaller changes will come later on in my statement.
§ I must turn, first, to the Exchequer prospect for 1967–68, after dealing briefly with the outturn for last year.