HC Deb 14 April 1970 vol 799 cc1225-31

I come now to the prospects for the year ahead and I begin with the world background against which we have to frame our policies.

World Trade and International Monetary Affairs

World trade seems likely to grow less this year than in the past two years. But its growth in the past two years has been exceptionally fast, especially in manufactures, which were up about 17 per cent. in both 1968 and 1969 compared with an average of 9½ per cent. a year over the previous decade. This year, the growth of the United States economy has been temporarily checked. But demand in Europe and Japan is still strong, the developing countries have higher reserves than in the past, and further progress in Kennedy Round tariff cuts should mean more trade in relation to output. World trade could grow much less than recently and still grow as fast as in the preceding 10 years.

Meanwhile, the outlook on the international monetary scene is considerably better than for some years. There is no speculation about the parities of any of the main currencies. The inauguration of the Special Drawing Rights scheme, with the distribution on 1st January, 1970, of the first allocations, was a highly satisfactory development. In addition, agreement has been reached on quota increases in the International Monetary Fund.

Balance of Payments

During 1968 and 1969 our exports rose much more rapidly than imports. This year, the growth of exports is likely to moderate, with the slow-down in world trade. Even so, they have probably not yet exhausted the full gains resulting from devaluation, and I expect a rise in the value of exports during the next year or so at a rate faster than the long-term trend.

Increased growth in the volume of imports is likely from now on, associated with a higher level of activity at home; but import prices may be expected to rise less fast than last year, so that the size of the import bill should be acceptable. Taking account, also, of invisible earnings, which have shown great strength during recent years, this means that we should have a strong balance on current account during at least the next 12 to 18 months, even though the surplus may fluctuate from quarter to quarter.

There were some exceptional elements in the long-term capital account in 1969. Private capital flows, mainly because of sales of overseas securities, were unusually favourable and there were also substantial foreign currency borrowings by public bodies. So it would be wise to allow for some deterioration this year and next, but this should be moderated by confidence in sterling and continued monetary stringency.

We can thus look forward to a satisfactory basic balance of payments surplus, taking the current and long-term capital accounts together. I make no precise forecast because of the margin of error inevitably involved in assessing, for example, the course of the United States economy and of world commodity prices. But on any reasonable "central" estimate, we can look forward to the maintenance of a surplus fully adequate to our continuing need to repay debt and build up our reserves.

Balance of Payments Measures

I deal here with certain policies and measures which bear directly on the balance of payments.

At the beginning of January I abolished the restrictions on travel expenditure outside the sterling area. A start has been made towards phasing out the import deposit scheme. Last December, Parliament enacted powers to continue the scheme for a further 12 months, but at a reduced rate of 40 per cent. I believe that the scheme has played a modest, but useful, part in moderating the increase in the import bill. But this effect has perhaps been less important than the contribution of the scheme to reinforcing our controls on domestic liquidity, and in helping to provide some short-term assistance to the reserves.

As I have previously stated, there are clear advantages in phasing out the scheme gradually, as the balance of payments situation permits. A further move is now justified and I have, therefore, decided to reduce the rate of deposit from 40 per cent. to 30 per cent. as from 1st May.

I have also considered overseas investment policy. This has been a subject of renewed discussion in recent months, and arguments have been put to me by the C.B.I. and others about the value of overseas investment and the effects of the restrictive measures which are and have been in operation.

The present restrictions are designed less to prevent direct investment overseas than to shift its financing. In fact, direct investment overseas assisted by borrowings on overseas capital markets has shown a continuing, substantial and healthy increase during the past four or five years; and we can warmly welcome the future earnings which this should bring.

As our position improves, it will be right to keep the possibility of relaxations under review. This is a direction in which we shall need to move in preparation for entry into the E.E.C. But for the present no important relaxation on this front would be sensible. I wish, first, to see our balance of payments maintaining its strength while the economy moves forward strongly at home. I have, therefore, decided both to maintain our exchange control arrangements affecting overseas investment and to ask again for the continuation of the voluntary programme.

The decision about the voluntary programme has been conveyed to the Governments of the four countries of the sterling area which are involved. A considerable degree of understanding has been expressed of the reasons which have led me to this decision. I realise the irksomeness of this restraint to United Kingdom investing companies and institutions who under growing pressure have continued to give loyal co-operation. I hope that they, too, will understand and accept this decision.

The domestic prospect and the Budget judgment

I turn now to the outlook for the domestic economy in 1970–71. In my Budget speech a year ago I gave some tentative projections, which were printed in the Budget Report, covering the period up to mid-1970. The Budget Report issued today gives provisional estimates of how the various elements of demand have changed up to the end of 1969 in comparison with these projections. I have always stressed the hazards of economic forecasting, although since 1968 I have published, and propose to continue to publish, far more forecasting detail than was hitherto the case.

A year ago I suggested that the outcome of such forecasts could not, except by accident, be wholly accurate. In 1969, however, we nearly had an accident. The correspondence between the projections and the provisional estimates of what has actually happened to the economy as a whole—although not in all cases to the components—is pretty close.

There was, however, one error which I am sure the House will welcome. Exports rose substantially more than in the "central" forecast and more, too, than in the alternative, higher, forecast given in the Budget Report. Manufacturing investment, which also rose strongly, was broadly in line with the forecast. In these vital sectors, our performance has been very satisfactory.

Other elements of demand have as a whole been restrained broadly as I had intended. Personal consumption has been a little higher than forecast, rising by 1 per cent. during 1969 instead of remaining flat, but this has been roughly offset by public expenditure on goods and services being lower—there was a fall of 1½ per cent. instead of a rise of ¾ per cent.—mainly as a result of the determined efforts made by the Government throughout the year to keep it under very strict control.

Finally, stockbuilding in the second half of last year was probably a little lower than forecast. But this was entirely because it was depressed in the third quarter. In the fourth quarter of 1969—contrary to a widely held impression—stockbuilding was at a very high level and yet the balance of trade in that quarter was strong.

I now come to the outlook for 1970–71. The economy will not have the same stimulus from an improving trade balance—for we do not need a continued improvement here—as during the past two years. However, I expect to see another substantial rise in manufacturing investment, though perhaps not so fast as the rate of over 10 per cent. per annum which took place last year—a rate of increase that could hardly be sustained for long without placing undue pressure on the engineering industries.

I know that there are different views about the prospects for industrial investment this year, and I shall watch the situation carefully. But my present view, based partly on the results of the latest official investment intentions survey, is that there should be a good increase.

There are three other elements of demand that are likely to grow faster than during 1969. First, stockbuilding is likely to increase at some stage, although the exact timing is hard to predict. Second, public expenditure on goods and services which has been severely restricted over the past two years—and has, indeed, fallen—will now begin to grow at a moderate rate. This is in line with our decisions on public expenditure as a whole announced in the White Paper of last December, which gives us a frame-work for charting and controlling its growth.

Third, and most important, there will be a faster increase in private consumption. A renewed growth of consumer spending is something which would be likely in any event at this stage; but the rate at which incomes have been rising recently makes a fairly strong rise in consumer expenditure a virtual certainty this year.

This factor necessarily imposes caution on me in my Budget judgment. It is wholly desirable, as I have already made clear, that consumer spending should grow somewhat faster than over the past two years; but in making my Budget judgment I have had to take into account the considerable boost which it will get from rising incomes, despite the fact that these will be to some extent offset by higher prices and proportionately higher tax payments with existing rates of tax.

Taking account of all the elements of demand, the central forecast is that, on the basis of existing pre-Budget policies and levels of taxation, output would grow by about 3 per cent. over the year ahead, that is, between the first half of 1970 and the first half of 1971. I describe this estimate as "central" because there is necessarily a substantial margin of error in forecasts of this kind, and this must be taken into account in formulating policy. Among the factors that are particularly difficult to forecast on this occasion are not only the impact of American developments on the world economy, but also the effects of monetary and financial conditions on investment, stockbuilding and prices.

But whatever the uncertainties, both in the world scene and in domestic forecasting, I have to make a Budget judgment. It will be obvious from what I have said already that this must be designed to set the economy upon a path of sustainable and gradually accelerating growth. I must avoid, on the one hand, the traditional temptations of a consumption surge which, because it would involve great risks for the balance of payments, would be likely to lead to an early, drastic, and only too familiar slamming on of the brakes.

On the other hand, I must avoid a situation in which demand is sluggish, investment is discouraged, unemployment rises, and there is a revolt against sensible balance of payments objectives. I wish to see neither "go-stop" nor "stop-go". Both are equally inimical to the aims I believe we can now achieve.

At the same time, I must bear in mind the competing claims of fiscal and monetary relaxation. Just as the one had to buttress the other a year ago, so they now compote for the limited resources we can this year afford to release. An exclusive concentration on fiscal relaxation would no doubt make more immediate popular impact, but a combination of modest fiscal and monetary relaxation may well be more conducive to the healthy growth of economic activity.

I therefore conclude that it is right to give a moderate stimulus to the economy, but to spread this between monetary and fiscal measures. On both, I intend to proceed fairly cautiously. If I find that my judgment is too cautious, it is much easier to correct this later in the year than if I go too far in the other direction. [Interruption.] Not, I am bound to say, a degree of caution which has unduly influenced right hon. Gentlemen opposite in the past.

I therefore propose to announce certain measures of limited monetary relaxation, accompanied by fiscal changes which will cost the Revenue rather more than £200 million in a full year. The prospect for the economy, after these changes, is a rate of growth on the basis of the "central" forecast of about 3½ per cent. between the first halves of 1970 and 1971. The rate of growth might be somewhat higher if the growth of export demand proves to be stronger than I now expect, or if consumption should grow faster. But a faster growth of consumption would be likely to involve some cost to the balance of payments.