§ I turn now, Mr. Speaker, to the general economic prospect and the basis of my Budget judgment.
§ In 1967 the rate of growth was only about 1 per cent., considerably less than had been expected at the beginning 259 of the year. The fall of exports through the year, and the low level of stock building, largely counteracted the increase in public investment and private consumption. Unemployment was relatively high throughout the year, though it has tended to fall in recent months. Wages were held in check in the first half of last year, during the period of severe restraint, but in the second half of the year a good many settlements took effect, and over the year as a whole both hourly wage rates and average earnings rose by 6 per cent. while retail prices rose by 2½ per cent. There was thus a rise in real wage rates of well over 3 per cent. It was not a rise which was earned by our national performance.
§ The rate of growth this year must be left to a large extent to depend on the way in which exports respond to the stimulus of devaluation. Unless that is done we shall invite the defeat of our main purpose, and upon a front where we can afford no more defeats. I have already told the House that I expect a large increase in the value of exports in 1968. I do not want to put a ceiling to that increase. We must be able to seize all the competitive advantages of devaluation as soon as they come through.
§ For this purpose we must check the growth of public expenditure and private consumption, which were the main expansionary forces last year, and release the resources necessary to sustain as large an increase in exports and industrial investment as possible. The measures announced by my right hon. Friend the Prime Minister on 16th January were designed to slow down the growth of public expenditure over the next two years and we intend to stand firmly by the pattern set out by him on that occasion. This will involve a sharp slowing down compared with recent trends, particularly in the case of public investment. Investment in some nationalised industries—in the electricity industry, for example, where it has been particularly heavy recently—may soon begin to fall. Public investment and public consumption are expected each to increase at a rate of little more than 2 per cent. a year up to mid-1969. Looking further ahead, we shall ensure that the claims of the public sector are compatible with the total resources available as compared with other calls upon them. This will be the central 260 task of this year's review of public expenditure.
This leaves consumers' expenditure, which accounts for well over half the total of national expenditure. It is determined above all by real income—by the relationship between money incomes and prices. The slower money incomes rise, the better for our competitive position and for our economic prospects. I shall have more to say about this later; it is of fundamental importance in our economic policy. At this stage I need only say that, with prices rising faster than usual on account of devaluation, real incomes are likely to grow more slowly than usual. In this situation there is bound to be some doubt about the behaviour of personal savings. My expectation would be that, if I took no steps in this Budget to restrain consumer demand, consumers' expenditure in real terms would be likely to increase over the period from the second half of 1967 to the middle of 1969 at a rate of about 1 per cent. a year.
§ A rise in consumption even at this modest rate, coming on top of the other demands on resources for which we must be prepared, is more than we can afford without undue risk. We have to provide for a big turn-round in stockbuilding and a sharp increase in fixed investment, while at the same time leaving ample scope for an improvement in the balance of payments. But these are not items which can ever be forecast with complete precision. I have to reckon with the real possibility that some elements in home demand, whether investment or consumption, will rise more quickly than is forecast. If this happened, or if exports responded more quickly to the stimulus of devaluation, we could perhaps meet the extra demand, but only at the cost of running quickly into inflationary conditions in which the competitive advantage of devaluation would soon be dissipated, and in which the flow of exports would be inhibited. We would be undermining a strong and secure balance of payments position before we had even achieved it. If both consumption and export demand grew faster, the result would be even worse. A growing home demand would fight a running battle with the improving export opportunity, and there is no doubt on past experience that it is home demand which would win. We should therefore have frustrated what must now be the central objective of our 261 economic policy—the largest and quickest possible turn-round in our balance of payments.
§ This must be our central objective, Mr. Speaker, both because it is by far the best way in which we can contribute to restoring the stability of the international monetary system, and because it is the key to our ability to pursue a policy of sustained growth. Excessive growth in the short-run before we have secured the balance of payments, would thus be the enemy of steady growth for several years to come. The vital thing this year and next is to put the balance of payments into substantial surplus. This can only be done by sacrificing the normal claims of home demand on our resources. But once this sacrifice has been made and the adjustment has been completed, there will thereafter be no reason why personal consumption, as well as other elements in home demand, should not rise year by year in accordance with the increase in output.
§ As we should know from painful experience over many years, there is no benefit in a sudden sharp burst of expansion which would quickly use up any margin of slack and recreate all the pressures of inflation. That is not satisfactory growth. Satisfactory growth depends mainly upon improvements in productivity. I very much hope that we can improve on our past productivity trend. But I am not going to count on this before we have achieved it. To do that would be to invite a rapid repetition of our past troubles. I therefore believe that I must budget for a cut-back of about 2 per cent. a year in consumption—a cutback, that is, from the 1 per cent. a year rise which would have been likely without budgetary action. I must warn the House that a cut in consumption of this magnitude requires extremely severe increases in taxation.
§ The House will wish to know what the economic prospect is after the imposition of this severe cut in consumption. Rather than go into detail and into many figures in this speech I have decided to provide this information in written form. I shall be publishing, in the Financial Statement, economic forecasts for the 18-month period from the second half of 1967 to the first half of 1969 inclusive. These forecasts take account of the measures I shall be announcing later this afternoon. 262 This is the first time such forecasts have been published, and I hope the House will find them useful in considering the measures I shall be proposing.
§ I must, however, warn the House that economic forecasting cannot, except by chance, be wholly accurate because forecasts depend in the last analysis on assumptions about future trends and developments, both here and abroad, which all may not share and which events may invalidate. This is indeed a particularly difficult year for forecasting. The shifts as a result of devaluation are so large that their extent is particularly difficult to predict. On top of that there are the present world monetary uncertainties. However, I decided that these were not sufficient reasons for postponing the introduction of what I believe would be a beneficial new practice. The inevitable risk that developments will in some respects—I hope not too many—falsify the forecasts is more than counterbalanced by the great advantages that will stem from a more informed discussion, both inside and outside the House, of our economic situation. If in the process we learn to improve our forecasting techniques as was suggested the other day by my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), so much the better.
§ According to these forecasts we can, after this cut in personal consumption, expect an average rate of growth in the gross domestic product in real terms of at least 3 per cent. a year over the whole 18-month period from the second half of 1967 to the first half of 1969. The faster we export, the faster output will grow and an increase at the rate of 4 per cent. a year is within the range of possibilities. Some hon. Members may want to go faster, but I would remind the House that even the lower rate of growth of about 3 per cent. would be a three-times improvement over what we achieved in 1967, and there will be room for a better export performance to lead us more strongly ahead.
§ Mr. Speaker, I could on the forecasts have taken a slightly more optimistic view and presented a less hard Budget than I am doing. I make not the slightest apology for not having done so. This is not a year in which to take any risks in that direction. It is a year in which to use devaluation to cure a major structural fault which has bedevilled our 263 economy for too long past. Compared with our more successful trade competitors we consume too much of our national income, import too much and export too little. Growth in itself will not cure that. Undirected, it might even make it worse. That is why we must make sure that there are effective restraints upon consumption, and that exports and import-savings are given the fullest opportunity to develop. That opportunity, particularly if accompanied by improvements in productivity, could put us on a new trend which could give us far more sustained and secure growth in the future.
§ Whether we manage to seize the opportunity depends not only on the fiscal policies which I follow in this Budget but also on the restraint which all sections of the community exercise in the demands they make on the expected growth of the national income. This brings me, Sir, to prices and incomes policy.
§ A firm and effective incomes policy is not a substitute for fiscal action as an instrument of demand management. I have not formulated my proposals on the basis that it could be, though they allow for its effects. Such a policy is, however, of crucial importance in relation to costs and prices. If we are to rid ourselves permanently of our balance of payments troubles we must master the tendency of our economy to generate excessive increases in wages and prices. There are already signs that renewed pressures for inflationary increases are building up. In the course of 1967, as I have said, average earnings per head rose by about 6 per cent., and in the second half of the year the rate of increase was even larger. The underlying increase in productivity was probably no more than 3 per cent. a year. The implications for our costs are obvious. The competitive advantage which we have gained by the change of parity will quickly disappear unless we can hold back pressures for increases in the national wage and salary bill which are unjustified by increases in productivity.
§ We have considered carefully whether the improvement we need could be obtained by means of a wholly voluntary policy, or by asking the House to legislate simply for continuance of the existing powers, which would otherwise ex 264 pire in the summer. We have had to conclude that neither of these courses would be adequate in present circumstances and that a much firmer policy for prices, incomes and dividends, backed by extended statutory powers, is essential, at least until the end of next year. On the incomes side its main feature will be a ceiling of 31 per cent. on increases in all the main forms of remuneration, but excluding increases directly related to the amount of work done. All increases must continue to be justified against the existing criteria of Cmnd. 3235. But these increases must be contained within the ceiling, whether settled at national, or local or plant level. The ceiling will be applied as an annual rate; thus, if in a particular case the criteria point to an increase and more than a year has elapsed since the pay of the particular group was last adjusted, the ceiling on any such increase will be correspondingly higher than 3½ per cent., though large increases will still need to be staged. There should continue to be a minimum interval of 12 months between settlements. There will be an exception to the ceiling for productivity agreements—stringently tested—which raise productivity sufficiently to justify a pay increase above 3½ per cent. But all such cases will have to conform to the guidelines set out by the National Board for Prices and Incomes in its Report No. 36.
§ In the wake of devaluation, some price increases are inevitable; and, as the House knows, a number of nationalised industries, which have held prices stable for some time must now raise their tariffs if they are not to build up increasing deficits—which would inevitably mean unacceptable increases in the total of public expenditure. But we must see that prices do not rise by more than is strictly justifiable, and we shall be seeking an extended power to enable us to defer or suspend increases which cannot be strictly justified.
§ We intend that this new policy should be applied from now on by all concerned in the determination of prices and incomes, including, of course, the Government themselves. Legislation will be introduced as soon as possible to reinforce the statutory powers available to deal with any breaches of the policy, whether on prices or on incomes. The main feature will be power to defer or suspend increases in wages, salaries or 265 prices for up to twelve months on reference to the National Board for Prices and Incomes. There will also be proposals for powers to reduce prices and to phase increases in the rents of local authority and private houses. We consider it necessary as part of our overall strategy for the economy to seek legislation covering at least 18 months, with freedom to renew it. My right hon. Friend the Secretary of State for Economic Affairs will be describing the new policy more fully when he speaks on Thursday, and a White Paper will be issued shortly.
§ The 3½ per cent. ceiling, Mr. Speaker, will apply to dividends. Companies will be required to limit any essential increase to not more than 3½ per cent. of the dividend for the preceding account year, and are asked to make no increase at all without good reason. No company, however, will be required by the operation of this standard to distribute lower dividends than it did two years ago, or possibly earlier in some cases. Statutory powers will be sought to back up this ceiling and prevent breaches of the policy. This scheme for dividend restraint will be more fully described in the 'White Paper and in a Treasury announcement to be issued this evening. It is intended that the scheme should apply to any recommendation for a quoted company's ordinary dividend made after today. In the case of such dividends, companies are asked to notify the Treasury in good time before they commit themselves wherever their intentions would be to increase dividends above the total for the last company year.
§ I believe that the need for this new phase in the development of prices and incomes and dividend policy will be widely understood. Neither our international competitiveness nor our national standard of living can be securely improved if increases in money incomes are not backed by an increase in real output. Understanding and support are vital for the success of the policy. But this would not be sufficient without statutory powers to deal with any groups—whether in the field of prices or incomes or dividends—who are not prepared to cooperate. The Government have the duty 266 of giving a firm lead, and we mean to ensure that the ceiling is applied at national, local and plant levels. I cannot sufficiently emphasise that our success in establishing the prospects for growth at home and external viability depends upon achieving a greater degree of restraint on the growth of money incomes. If we are unsuccessful in achieving these objectives, we could well find ourselves confronted with a disastrous impact on the economy and a significant lowering in the standard of living.
§ It must be recognised, however, that a ceiling of 3½ per cent. on wage increases, strictly applied, will press hard on people of small means, and particularly those with families. We propose to mitigate these consequences by increasing family allowances with effect from 8th October, 1968, by a further 3s. over and above the increase of 7s. which will be paid from 9th April, 1968. We are making arrangements to concentrate this new benefit on those families whose need is greatest. So we shall adjust child dependancy allowances and supplementary benefits, where children also qualify for family allowances, so as to keep the total public provision for those children unchanged, and we shall recover the further increase from those who pay tax, in the same way as the 7s. increase, under arrangements which I shall describe later in this speech.
§ We propose to meet the net cost of this further increase by a small change in National Insurance benefits, the savings resulting from which will accrue to the National Insurance Funds rather than to the Consolidated Fund. We propose to discontinue the payment for the first three days of sickness, injury or unemployment which is at present made after a period off work has lasted for a fortnight. Legislation will be necessary both for the increase in family allowances and for the change in provisions for sickness, injury and unemployment benefit, and a Bill will be brought before Parliament in the near future. This legislation will give the House an opportunity of considering these proposals in detail. The Government of Northern Ireland will be introducing their own legislation on similar lines.