§ With the achievements of the past two years behind us, I believe that we now have an opportunity, such as has not occurred for a good many years past, to set the economy on a path of sustained and accelerating growth. It is in this perspective that I have made my Budget judgment. If we are to achieve this aim, there are, in my view, three essential requirements of economic policy.
§ The first is that the growth of total demand must be kept in line with the increase in our productive potential. It is sometimes argued that because we now have a big balance of payments surplus we can afford to inflate home demand and achieve an eruption of short-term growth. This would be a piece of familiar folly, bringing its own inevitable retribution. Very soon we should be back in deficit and crisis. My aim is a much greater prize—a real improvement in the long-term growth of the economy; and this can only be achieved if we steer well clear of the dangers of balance of payments weakness which have cramped and inhibited us so often and for so long.
§ This does not mean that domestic demand cannot grow at a good rate. During the last couple of years, both private consumption and public expenditure had to be held below any reasonable long-term rate of growth so that we could transfer resources into the balance of payments. But there is now no reason why they should not go forward from here roughly in line with the national product as a whole. If we can keep this balance, the growth of productive potential itself may 1224 accelerate. There is certainly no eternal law that limits our growth rate to levels achieved in the past.
§ The second requirement is an improved and sustained growth of industrial investment. Both the level of our industrial investment and the quantity and quality of the capital stock in British industry have been inadequate for many years. We cannot put this right overnight, but it must be an essential aim of economic policy to increase manufacturing investment over a period of years at a rate substantially faster than the national product.
§ The most important contribution which the Government can make towards achieving it is to increase confidence in the prospect of steady and sustained growth in the economy as a whole. It is also most important that the capacity of the engineering industries which supply goods for investment should be built up so that they will not be overloaded by a greater demand for plant and machinery. I was encouraged to see that the latest C.B.I. industrial trends survey showed investment intentions considerably stronger in the capital goods sector than in industry generally.
§ The third requirement is that we preserve our competitive position. So far, since devaluation we have done reasonably well in this respect. No industrial country has for long been able to combine a high level of employment and a healthy rate of growth with absolute stability of prices, and certainly none is doing so today. But there are dangers for this country in the present situation to which I must draw attention.
§ There is a danger that, under the pressure of steeply rising incomes, unit costs will go up more rapidly and we may move on to a much steeper trend of inflation than we have known in the past. If others achieve greater stability, this will obviously affect our competitive position, and, therefore, the balance of payments, adversely; but there is perhaps even more cause for concern from the domestic social point of view.
§ If serious inflation gets a grip it will be very difficult to shake it off; and in all sorts of ways it will be the weaker members of society who will suffer. The illustion that money incomes can be pushed up by the kind of figures which 1225 have become common in industrial bargaining recently without producing harmful effects of this kind, is a dangerous one. Everyone concerned with wage settlements should understand that if we are to achieve the reasonable stability of prices which is necessary for a sound economy and a healthy social framework, incomes cannot for long continue to rise at their recent rate.